Bernstein: Aerospace & Defense — A Primer on Global A&D

Bernstein published a comprehensive primer on the global aerospace and defense industry to help investors understand fundamental business and equity drivers amid ongoing macroeconomic and geopolitical instability. Commercial aerospace is a cyclical sector driven by GDP growth and airline profitability. The two dominant original equipment manufacturers, Airbus and Boeing, hold massive order backlogs providing nearly a decade of visibility. Currently, supply chain constraints, rather than demand, serve as the primary differentiator for equity performance. The report emphasizes that the aftermarket is critical for engine suppliers, including GE Aerospace, Safran, RTX, Rolls-Royce, and MTU Aero Engines. Persistent new aircraft shortages have created a highly favorable aftermarket cycle, allowing engine manufacturers to capture significant value within the supply chain. On the defense side, industry health is dictated by geopolitical threats rather than broader macroeconomic cycles. Defense contractors generally exhibit low capital expenditure requirements, strong cash flow generation, and inflation protection. The report notes that European defense companies producing short-cycle products, such as ammunition and ground vehicles, have recently outperformed peers. However, the next defense spending phase should favor companies specializing in high-demand categories like air defense systems, missiles, and fighter aircraft. Bernstein covers 23 stocks, assigning Outperform ratings to 11 and Market-Perform ratings to 12, including top picks like Rheinmetall, Leonardo, and Howmet.