Narrow-Body Production Concerns Will Linger As Capacity Expansion Supports Resilience

Key Takeaways

• Potential production challenges and uncertain narrow-body aircraft demand could impact revenue and operating margins, reflecting conservative growth forecasts.
  
• Increased capital expenditure and headcount growth could strain cash flows and net margins, with liquidity pressured by share buybacks and dividend commitments.
  
• Strong financial health and strategic investments in key segments enable Howmet Aerospace to sustain growth, enhance profitability, and provide value to shareholders.

Catalysts

Provides advanced engineered solutions for the aerospace and transportation industries in the United States, Japan, France, Germany, the United Kingdom, Mexico, Italy, Canada, Poland, China, and internationally.

• Concerns over potential production challenges at Howmet Aerospace could impact revenue, particularly if Boeing's narrow-body aircraft build rates do not meet expectations due to inventory adjustments or supply chain disruptions, which remain uncertain for 2025.
  
• Despite strong performance and market positioning, the company's decision to remain conservative with revenue growth forecasts, especially in the Commercial Aerospace segment, suggests potential weaker-than-expected demand impact on operating margins.
  
• Howmet Aerospace's planned increase in headcount by approximately 1,000 net new employees, combined with uncertainty regarding narrow-body build assumptions, could lead to operational inefficiencies and higher operating costs, affecting net margins.
  
• The company's substantial capital expenditure increase in both 2024 and anticipated in 2025 for capacity expansion presents a risk of strained cash flows, should expected revenue growth not materialize as projected.
  
• With the focus on share buybacks and dividends as primary uses of free cash flow, any unexpected earnings fluctuation or cash flow pressure could lead to reduced liquidity readiness, impacting earnings per share and shareholder value.

Howmet Aerospace Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Howmet Aerospace compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Howmet Aerospace's revenue will grow by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.5% today to 18.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.7 billion (and earnings per share of $4.15) by about April 2028, up from $1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 33.6x on those 2028 earnings, down from 43.5x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 29.9x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Howmet Aerospace Future Earnings Per Share Growth

Risks

• Howmet Aerospace's strategic focus and commercial discipline have enabled the company to restore previous margin highs, especially in its Fasteners business. This suggests a potential for improved operating margins and higher profitability.
  
• The Engines Products segment showed strong performance with record revenue and EBITDA, indicating robust demand that could support revenue growth and margin expansion in the coming years.
  
• The Commercial Aerospace sector continues to experience strong growth, and Howmet has outgrown each of its respective markets in 2024, reinforcing the potential for higher revenue and earnings moving forward.
  
• Howmet's strategic investments in capacity expansion and CapEx are tied to customer contracts, positioning the company for future revenue growth and stronger cash flows, especially in segments like Industrial Gas Turbines.
  
• A strong balance sheet with improving financial leverage and a recent credit rating upgrade by S&P and Moody’s reflects a healthy financial position. This may enhance Howmet's ability to invest in growth initiatives and return value to shareholders through dividends and share repurchases.

Valuation

• The assumed bearish price target for Howmet Aerospace is $121.54, which represents one standard deviation below the consensus price target of $138.6. This valuation is based on what can be assumed as the expectations of Howmet Aerospace's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $159.65, and the most bearish reporting a price target of just $85.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $9.2 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $123.93, the bearish analyst price target of $121.54 is 2.0% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.