Expansions In Japan And Europe Will Shape A Positive Future

Key Takeaways

• Strong demand for fuel-efficient and defense aerospace engines indicates likely revenue growth supported by solid customer agreements and capacity expansions.
  
• Operational efficiencies and strategic capital deployment suggest improved margins and enhanced shareholder returns, bolstering a positive earnings outlook.
  
• Tariffs, supply chain issues, and economic uncertainties may impact revenue and margins across aerospace and commercial transportation sectors, with potential inventory challenges.

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.

• Record backlog for new, more fuel-efficient aircraft and increased demand for defense aerospace engine spares suggest an upward trajectory in revenue.
  
• Significant investments in capacity expansions in Japan and Europe are backed by solid customer agreements, indicating long-term revenue growth.
  
• Continued strong performance in the Engines and Fastening Systems segments, with exceptional EBITDA margin increases, showcases operational efficiencies leading to improved net margins.
  
• Record EBITDA and earnings performance, bolstered by transformative operational and commercial improvements, suggest a positive earnings outlook.
  
• Capital deployment strategy, including increased dividends and share buybacks, indicates a focus on enhancing shareholder value that could positively impact earnings per share.

Howmet Aerospace Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Howmet Aerospace's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.6% today to 20.2% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $5.08) by about May 2028, up from $1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.3 billion in earnings, and the most bearish expecting $1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.4x on those 2028 earnings, down from 50.2x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

Howmet Aerospace Future Earnings Per Share Growth

Risks

• Tariffs have increased uncertainty and reduced confidence in certain markets, especially in North America, potentially impacting revenue and market demand.
  
• Delays and issues in specific aircraft builds, such as the 787 and A350, due to backlog and supply issues, could negatively impact revenue from aerospace components.
  
• Commercial Transportation remains challenging, with a reduction in revenue, potentially impacting earnings from this segment.
  
• Economic uncertainties in North America and potential impacts from tariffs could lead to unexpected cost increases, impacting net margins and earnings.
  
• Destocking headwinds and overproduction in certain engine segments, like the LEAP engine LPT parts, could lead to revenue shortfalls or inventory management issues.

Valuation

• The analysts have a consensus price target of $159.689 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 $185.0, and the most bearish reporting a price target of just $112.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.0 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $155.8, the analyst price target of $159.69 is 2.4% higher. The relatively low difference between the current share price and the analyst consensus 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.