This article originally appeared on Aviation Week.
As equity markets continue to hit new highs, the prices of aerospace and defense stocks have risen in tandem, leaving companies fully, if not overly, valued. The top 20 Western aerospace stocks are now trading at an average of 14 times pre-tax earnings for the prior year, well above the 8-12-times range typically seen since the 9/11 attacks.
Justifying and maintaining such lofty valuations requires significant profit growth, but that is easier said than done. Stock prices have already baked in record commercial market deliveries and backlogs, and while defense spending market outlooks have improved, they are nowhere near the rates warranting such investor exuberance.
So what’s a company to do to keep growing value? Even if contractors are able to squeeze out more costs and deliver programs on time and budget, the resulting financial uplift for most would still fall short of their current expectations. And using operating cash to buy back shares at such high prices has limited value. For many companies, the only meaningful option left is to take a deep look at their existing portfolios and alter the mix to deliver a better performance.
Read the full article at Aviation Week.
Jim Wininger is a partner with Bain & Co. in Atlanta. Mike Goldberg leads Bain’s Aerospace, Defense & Government Services practice from Los Angeles.