View from City Road: Boeing batters aerospace sector

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The Independent Online
SHARES in the aerospace components sector were conspicuously absent from the stock market party yesterday.

The ghost at the feast came in the form of news from Seattle of fresh production cuts at Boeing, which were quite as bad as had been feared.

United Technologies chimed in banshee- like with an announcement of a 10,500 - or nearly 25 per cent - cut in the workforce at Pratt & Whitney, its aero engine subsidiary, which lost dollars 500m in 1992.

Like its rival General Electric, Pratt & Whitney has seen no noticeable improvement in demand for engine spares, a vital source of profits since spares yield margins of 60 per cent against virtually nothing on new engine sales.

Cuts at Boeing were inevitable. Orders for its entire product range, except, so far, the new wide-body 777 aircraft, are running well below projected production rates.

Overall production is to be cut by more than 20 per cent, including retrenchments of between 30 per cent on the high volume 737 and 40 per cent on the 747 and 767.

Smiths Industries, which supplies avionics to Boeing, was the main victim of such gloomy news yesterday, losing 10p to 359p.

Unusually for an aerospace share, it has been outperforming the stock market and earned a premium rating. Although a tribute to Smiths' proven management skills, such a bravura display may be hard to sustain in a continuing aerospace downswing.

TI Group, assailed by profit downgradings, was unchanged at 293p and must rue, in the short term if not the long, its move to expand into aerospace with the purchase of Dowty Group. Hefty Airbus cancellations by GPA and Northwest Airlines have been a bad blow and will not have helped Lucas Industries, already battling with a poor motor components market.

Pratt & Whitney's problems will do nothing to help sentiment towards Rolls-Royce, which the market expects to cut its total dividend from 7.25p to 5p or less, reducing the appeal of an apparent 8.2 per cent yield.

There could well be worse to come, so the sector should be left until later this year. British Aerospace is the joker in the pack and will remain a lively trading counter.