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Sizing Up Stocks in a High-Flying Sector

Ted Kemp
Friday, 15 Jun 2007 | 5:54 PM ET

Sure the aerospace industry is going gangbusters, but that doesn't necessarily mean it's a sure bet for investors.

Commercial airline manufacturers have a backlog of orders that in the case of some companies runs more than five years into the future. And though the orders of today become the revenue of tomorrow, that might not mean rising share prices.

"The issue is how much of that strength is reflected in the stocks—and a lot of it is in the stocks," says Chief Equity Strategist Bob Toomey of E.K. Riley Investments. "From an investment standpoint, what's your risk/reward? I don't see the risk/reward as attractive."

Toomey has a "hold" rating on Boeing , but rates avionics, controls and sensors maker Esterline Technologies an "accumulate."

But there's been talk among market-watchers of the possibility of a "super cycle" in the industry, Toomey says. High oil prices are driving demand for more fuel-efficient planes, such as Boeing's 787, and demand out of Asia is surpassing any level it's ever reached in previous cycles. Eastern European and Russian airlines are also vying for more commercial aircraft than they have in the past.

Other analysts take a more sanguine view of the aircraft makers and parts suppliers. JSA Research follows about two dozen aerospace stocks, says analyst Paul Nisbet, who recommends almost every company in the sector. He sees continuing strength on both the commercial and military sides "for at least a couple years."

In the long term, both analysts like the commercial companies more than the heavily defense-dependent firms.

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