West Virginia is a unique place to grow up.
It’s a tiny state tucked away entirely in the Appalachian Mountain range… which has historically kept more people outside of it than within its borders.
Most of those people are tucked away in small towns that popped up along industry supply chains – namely, the major river valleys and their tributaries. And because of all the mountains in between, there isn’t a whole lot of travel between them.
Over the years, that has naturally resulted in a series of small, tightly-knit communities – frankly, great places for a kid to grow up.
But with such a small population, no major population center, and a relatively short history, West Virginia doesn’t have much money or prestige to compete for. And because of that, we don’t have quite as many notable titans of industry and politics many other states do.
Virginia has its presidents, Kentucky has Lincoln and the Colonel, Pennsylvania has Andrew Carnegie, and well… you get the idea.
So, in order to make an impact on the popular consciousness, West Virginians have typically had to hustle more than most. And because of that, some of our most famous natives – NBA legend Jerry West, Olympic gold medalist Mary Lou Retton, and 5-time Emmy winner Don Knotts for instance – found notoriety and success in sports or the arts.
But as much as we looked up to all those great performers, it was the military that arguably produced our state’s most genuine heroes.
And fewer still with the remarkable combination of raw talent, grit, and dogged determination that characterized the late, great Chuck Yeager.
Breaking Barriers
Charles Elwood Yeager grew up in sleepy Lincoln County, WV, hunting and fishing alongside his father Albert, who had a natural gas drilling business. Although he was an average student, he had spent his childhood learning about all the pumps, generators, and pressure regulators involved in his dad’s business.
As a result, he had a clear an affinity for machines and a knack for understanding machines. And according to his website, by the time he graduated from Hamlin High School, he could disassemble Chevrolet engines, overhaul them, and reassemble them with ease.
That talent proved handy after enlisting as a private in the US Army Air Force. Although his age and grades initially prevented him from becoming a pilot like he wanted, his skill set managed to keep him around the flight teams… by serving as a mechanic.
That’s important, because less than three months later, the entry of the U.S. into World War II rendered the USAAF’s recruiting standards moot. And Yeager, with his brash personality and sharp 20/10 vision, got the break he was looking for – becoming crew chief on an AT-11 and earning his pilot’s wings not long thereafter.
Yeager would distinguish himself as a fighter pilot.
Stationed out of Leiston, UK, Yeager flew P-51 Mustangs named “Glamourous Glen” after his future wife. Yeager was shot down over France in March of 1944, but eventually escaped to Spain by March 30 with the help of French Resistance. On his way back to the UK, Yeager earned a Bronze Star for helping other airmen cross the Pyrenees.
But it isn’t his war record that made him a household name.
Yeager became an Air Force test pilot at Muroc Army Air Field (now Edwards Air Force Base). And after another pilot demanded $150,000 of hazard pay to break the sound barrier, the USAAF instead chose the confident Yeager to fly the Bell XS-1 in a test flight.
And then Yeager – nursing two broken ribs, no less – became the first man to break the sound barrier on October 14, 1947, flying the X-1 Glamorous Glennis at Mach 1.05 over the Mojave Desert.
And the rest, as they say… is history.
Heroes With Motors
With that accomplishment, Yeager – now the fastest man alive, and larger than life – became a bit of a real-life superhero.
In fact, Yeager’s story became the basis of Hal Jordan, the Silver Age Green Lantern. And in 1983, director Philip Kaufman made the movie “The Right Stuff” about Yeager and several of his remarkable colleagues.
But his celebrity did more than that… it helped to usher in the Jet Age that captured the hearts and imaginations of so many young Americans in the 50s and 60s. And in turn, that kind of inspiration derived from awe and wonderment often gives rise to a diligent work ethic.
And that kind of autodidactic, self-motivating desire to grind out success is a characteristic we all put a premium on. Or as legendary college basketball coach – and fellow West Virginia native Bob Huggins – once put it, “I like to recruit kids with motors.”
So it should come as no surprise that huge influx of inspired, entrepreneurial talent helped create brand new competitive industries devoted to national defense and aviation. And the resulting Golden Age of Capitalism created more new wealth on an inflation-adjusted basis than at any time in history.
Now, those industries have changed mightily over the years. But nevertheless I thought it would be a fitting tribute to Chuck Yeager for us to strap in… ›and take a look under the hood.
Motors For Heroes
I was frankly expecting the broader industry to be a little larger, but after a few decades of consolidation, only 77 publicly traded companies remain in the Aerospace and Defense sectors.
Source: Bloomberg
And of those, only 27 have valuations over US$500 million and sufficiently liquid average daily trading volumes.
Source: Bloomberg, Seawolf Research
And so in a similar fashion to the analysis I gave on the gold sector back before Thanksgiving, I thought it was best to take these equities and do a quick cash flow comparison. If you’re at all familiar with the sector, the top three won’t come as much of a surprise to you.
Source: Bloomberg, Seawolf Research
Those three companies, Northrop Grumman (NYSE: NOC), Raytheon (NYSE: RTX), and General Dynamics (NYSE: GD) have been dominant players in the aviation and defense industries for decades.
But there’s another titan of industry suspiciously absent from the group…somewhat ironically, it’s the largest one.
I’m talking, of course, about Boeing (NYSE: BA), whose most important product – the new 737 MAX airliner – has been grounded since March of last year following two separate crashes. That has resulted in a staggering number of cancellations and delays that have crushed the company’s cash flow, losing a staggering US$24.5 billion over the past 18 months.
Source: Bloomberg, Seawolf Research
Yikes.
However, there’s been some good news recently, as the grounding was lifted less than a month ago, and the plane is set to return to service fairly soon. Moreover, Boeing is expected to deliver the first 737 MAX plane to customers since the grounding went into effect.
And although the aviation industry won’t likely return to normal until well after the pandemic comes to a close, Boeing’s cash flow is undoubtedly going to improve. Maybe not to the $3 billion+ per quarter like we saw in mid-2018, but perhaps back to somewhere around Q1 2019 numbers at roughly 1/3 of that level.
So, if we add Boeing into that group above and look at the 2020 performance, they look…well, they look pretty ugly, with each one down double-digit percentages.
Source: Bloomberg
That said, the two that were affected the most – Boeing and Raytheon – have also been on a tear of late.
They also happen to be the two largest, are diversified across the sector’s sub-industries, and have the most upside remaining to their pre-pandemic levels.
And for me, that’s all “The Right Stuff” I need to see in order to deploy a ¼ stake in their general directions.
All the best,
Matt Warder