Engine Spares And IGT Investments Will Boost Future Performance

Key Takeaways

• Howmet's solid performance in aerospace and engine spares anticipates future revenue and earnings growth, outpacing market expectations.
  
• Investments in industrial gas turbines and structured improvements increase margins, bolstering shareholder value and earnings per share.
  
• Challenges in the aerospace market and high investments could pressure Howmet Aerospace's revenue, especially if key sectors underperform or if operational efficiencies are strained.

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.

• The company showed robust revenue growth, particularly in the Commercial and Defense Aerospace segments, with expectations to outpace market growth in 2025, which could positively impact future revenue.
  
• Continued strong performance in Engine Spares revenue, which grew approximately 25% in 2024, is expected to contribute significantly to Howmet's top line going forward as spares are projected to reach 20% of total revenue, impacting earnings favorably.
  
• Investment in Industrial Gas Turbine (IGT) capacity, driven by increased electricity demand and data center expansion, positions the company for mid-single-digit growth in this segment, which should enhance revenue and EBITDA margins.
  
• Improvement and optimization within the Engineered Structures segment, which saw a significant increase in EBITDA margins, suggest ongoing financial benefits from operational efficiencies and strategic focus, positively impacting net margins and earnings.
  
• A strong balance sheet and liquidity, along with planned share repurchases and dividend increases, are expected to enhance shareholder value, which should drive earnings per share growth.

Howmet Aerospace Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Howmet Aerospace's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.5% today to 19.2% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $4.72) by about March 2028, up from $1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.2x on those 2028 earnings, down from 43.7x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 31.8x.
• 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 6.5%, as per the Simply Wall St company report.

Howmet Aerospace Future Earnings Per Share Growth

Risks

• Potential challenges in the global aerospace market, such as supply chain disruptions or geopolitical tensions, could adversely impact Howmet Aerospace's revenue growth, especially in its key sectors like Commercial and Defense Aerospace.
  
• Increased investments in CapEx for growth, while beneficial long-term, could pressure Howmet's net margins if returns do not materialize as expected or if costs overrun.
  
• Continued underperformance in the Commercial Transportation segment might drag on overall earnings, particularly if recovery in this area takes longer than anticipated.
  
• Elevated reliance on the aerospace sector, especially products like the Boeing 737 MAX, introduces risk if production rates or market demand do not meet expectations, potentially impacting revenue and profits.
  
• Execution risk associated with Howmet’s expansion and workforce growth (e.g., net employee increase) could strain operational efficiencies, affecting EBITDA margins unless properly managed.

Valuation

• The analysts have a consensus price target of $139.86 for Howmet Aerospace based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $9.8 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 35.2x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $124.4, the analyst price target of $139.86 is 11.1% higher.
  
• 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.