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Recovery hopes boost U.S. aerospace, defense sectors

Originally reported on Reuters:

(Reuters) – The shares of U.S. aerospace companies, including Dow component Boeing Co (BA.N), rose on Thursday as investors digested an improving outlook for the sector.

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The Standard & Poor’s Aerospace & Defense Index .GSPAERO rose to a year high on Thursday and aircraft maker Boeing was on track for its highest close since June 2008. Boeing is the best performing Dow component so far this year.

In recent weeks, commercial aerospace companies have shown strength as airlines cited rising demand among business customers.

“The air transport industry is finally starting to turn a corner,” said Wayne Plucker, a senior industry analyst at Frost & Sullivan.

He said carriers eyeing the prospect of higher fuel prices as the economic recovery gains steam will likely look to acquire more efficient airplanes, factors that bode well for Boeing, its chief rival Airbus (EAD.PA) and other plane makers.

“Boeing had a terrible year last year. Airbus was only marginally better,” Plucker said. “For both of them now, there’s light at the end of the tunnel.”

Boeing’s stock has risen 30 percent this year, while defense industry leader Lockheed Martin Corp (LMT.N) is up 14 percent in 2010. Other aerospace and defense company stocks, including suppliers Goodrich Corp (GR.N) and L-3 Communications Holdings Inc (LLL.N), are also up on the year.

Sentiment on Boeing has also been buoyed by recent company comments it is mulling whether to increase production rates of its 777 and 737 models, with decisions expected this year.

Sanford Bernstein analyst Douglas Harned said Boeing’s 787 Dreamliner program “appears to be making substantial progress, although challenges remain,” in a note to clients on Thursday.

Meanwhile, defense companies have been aided this year by signs U.S. spending will not fall precipitously. Last year, prospects for the industry were overshadowed as the Obama administration cut some big weapons programs.

“Is there going to be some retrenchment? I’m almost sure there is, but it’s not going to be draconian retrenchment,” Plucker said of U.S. defense spending.

The need to upgrade U.S. military equipment abroad creates opportunity for defense companies, Plucker said.

Boeing shares closed up 2 percent at $70.87 in New York Stock Exchange trading and Lockheed was up 1.3 percent at $85.94.

(Reporting by Karen Jacobs; editing by Andre Grenon)