GE Offers Promising Outlook for Aviation

General Electric (NYSE:GE) released earnings on Friday, beating EPS forecasts by $0.05 and revenue by $1.74 Billion.  That didn't prevent their stock from taking a 1.8% hit pre-market, however, due primarily to a 2% decline in orders and what they described as a "volatile and slow-growth economy."

The news, however, appears rather bright for the Aviation industries.  GE reported a strong first half of the year in that industry, and is forecasting the remainder of 2016 to remain strong as well.  There were a couple of items that bode well for the airlines, at least according to GE.  They saw commercial traffic growth of over 6% this year, down a bit from last year, but still experiencing a healthy growth pattern.  Additionally, the airplane load factor remains at 80% for the second year in a row, and GE reports over 2 million departures added in the past year.

GE reports, not surprisingly, that jet fuel continues to be deflationary, and is down over 50% over a three-year period.  When you combine the lower fuel costs, increased passenger demand, and a very strong load factor, it's reasonable to expect a healthy year for what has been an oddly depressed airline industry that has been in an Elliott Wave zig-zag and flat pair of corrective patterns for the past 18-months.  (Do keep in mind the Schlumberger warnings of an impending oil supply deficit, however.  If that manifests, it will put an end to depressed jet fuel costs.)

You can see the overall pattern for the airline index in this weekly chart:

Airline Index Weekly Chart

We can see on the chart that the index started a steep uptrend in October, 2011.  It then traced out a very distinctive 5-wave impulse pattern that completed in January, 2015.  Since then, however, it completed a classic A-B-C Zig-Zag pattern, retracing almost 50% of the prior impulse pattern, and it looks like it's starting a possible flat correction now.  This overall pattern appears to be Wave 2 of a larger overall 5-wave Impulse, so once this corrective pattern completes, we can look forward to a very healthy third wave impulse.  Long-term traders should enjoy a very nice 3 or 4 year bull trend in airlines once that wave kicks off.  The way this pattern is trending, though, that may not happen until 2017.

Returning to GE, there were some additional interesting comments related to defense spending.  They forecast it to be flat in 2017 here in the US.  Given the number of industries here dependent upon defense spending, that's a cautionary note that we'll have to carefully watch.  Now, this flat projection may well be due to the number of sizeable contracts that were awarded in 2015 and early '16, so a pause in new contracts is to be expected, but it will be important to watch other companies in the industry to see how this matches their own forecasts and revenue plans.

Interestingly, GE forecasts international defense spending to be up 4% globally (excluding the US.)  That comes at a time when Europe is teetering on recession and facing the unknown threat of Brexit, so that 4% value is likely depressed due to the state of the global economy.  Should the economy heat up, it's reasonable to expect a similar increase in global defense spending, especially at a time when the terror threat appears to be spreading to parts of Western Europe.

With US defense spending flat but international defense spending up, we'll need to watch for companies that have a strong global stake.  These would include Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), and Raytheon (NYSE:RTN).  Fire Support, a defense marketing website includes an excellent list of the top 100 global defense companies for 2015.  While the list is a year old, the major players in this space have not changed.  If you're looking for companies that will benefit from growth in international defense spending, this is an excellent place to start.

From a trading perspective, it looks like there will be some short-term potential plays in the airlines, but be aware that there should be at least one more downward wave in the correction.  Longer term players can look forward to growth of a bit over 200% in the airline index from 2017 to 2021 if the Elliott Wave pattern holds true. For defense contractors, look more for trades in companies servicing overseas orders.  Just be aware of the impact the strong US dollar will have on their exchange rate and earnings forecasts. 

Happy Trading.