According to research by industry leader The Boeing Company (NYSE:BA), the number of civilian planes in service is set to double by the year 2032. In addition, 75% of the planes already in service will need to be replaced over the same period. So, Boeing’s predictions estimate that by 2032, 35,280 new planes will need to be manufactured for the global aviation industry for a total cost of $4,840 billion.

LMI Aerospace

Civil aviation industry attractive for contractors

This obviously presents an opportunity, as even with military aviation budgets being cut around the world, it would appear as if aerospace contractors are going to have their work cut out for them over the next decade, catering to the need of the civil aviation industry.

Unfortunately, the rising demand for planes is already well understood by the market and companies like The Boeing Company (NYSE:BA) and contractors such as Precision Castparts Corp. (NYSE:PCP), are trading at valuations, which value investors will not find attractive. However, one company has caught my eye having been sold off after poor Q2 results.

LMI Aerospace, Inc. (NASDAQ:LMIA) is a relatively small $155 million aerospace contractor. The company has three main divisions, aerostructures, responsible for the manufacture of components used in the construction of large commercial and corporate aircraft. Engineering services and composite production, providing state-of-the-art manufacture and design of composites.

LMI Aerospace, Inc. (NASDAQ:LMIA) is well placed to benefit from the aerospace boom during the next few years. However, the company is currently being shunned by investors after its acquisition of peer Valent. The acquisition has boosted LMI’s revenues by 50% and doubled its asset base, although, as of yet many of the synergies that were promised and have not materialized. Additionally, the company has been left with several duplicate manufacturing facilities, which are proving hard to restructure and generate the promised efficiencies.

LMI Aerospace cash flows

The uphill struggle that LMI Aerospace, Inc. (NASDAQ:LMIA) faces becomes apparent when looking at the company’s cash flows and consistent issuance of debt. To finance the acquisition of Valent back in Q3 2012, LMI issued $260 million in debt, since then the company has needed to borrow an additional $30 million, or $15 million to fund every-day operations and working capital requirements. Furthermore, at the end of the second quarter the company only had $2.6 million in cash, so it is likely that LMI will need to raise more finance through debt during Q3.

Having said all of that, there are notable changes occurring within the company. For a start, the company is noticing significant changes and synergies arising from the merged entity, although not as fast as originally hoped. During the first half of the year, LMI Aerospace, Inc. (NASDAQ:LMIA)’s quarter-on-quarter operating margin nearly doubled from 5.7%, to 11% and the firms gross margin expanded by 10%. In addition, management noted on the company’s Q2 earnings conference call that significant progress was being made restructuring the company’s manufacturing facilities and customer orders remained strong boosted by the success of The Boeing Company (NYSE:BA)’s Dreamliner.

LMI’s valuation

On a valuation basis, the company is trading below book, which stands at $16.20 per share, although excluding goodwill, book value falls to $2.20 per share, so caution should be exercised here.

Still, management remains proactive and positive overall, expecting the company to return to profit and positive cash generation during the second half of this year, a goal that is very realistic. Indeed, since the acquisition of Valent, excluding working capital changes, LMI Aerospace, Inc. (NASDAQ:LMIA) was cash flow positive during the last quarter.

LMI is expected to produce full year EPS of $1.20 for 2013, which puts the company on a forward earnings multiple of 9.9 – compared to the aerospace and defense sector average of 13. EPS are expected to come in at $1.80 for 2014.

So overall, LMI Aerospace, Inc. (NASDAQ:LMIA) could be a value risk worth taking. Margins are expanding, the company is expected to return to health next year and when it does it looks as if it could be one of the cheapest plays in a rapidly growing sector. The only factor I’m concerned about is the company’s low tangible book value, although the risk here could be worth the reward.