Strong Demand For F-35 And Turbine Blades Will Drive Future Aerospace Opportunities

Key Takeaways

• Expected commercial and defense aerospace sector growth, driven by strong demand, to catalyze future revenue and stable earnings growth.
  
• Strategic investments and high cash flow to enable shareholder returns through share buybacks and potential dividend increases.
  
• Revenue pressures due to weak market conditions, supply disruptions, and execution risks could challenge overall growth and profitability for Howmet Aerospace.

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 expected recovery and production increases in the commercial aerospace sector, driven by the end of the Boeing strike and a strong demand for air travel, are catalysts for future revenue growth.
  
• Growth in the defense aerospace sector, fueled by programs like the F-35 and demand for fighter engine spares, is expected to boost revenue and support stable earnings growth.
  
• Investment in new capacity for engine products, particularly turbine blades to meet rising aftermarket demand due to increased maintenance cycles, is likely to enhance revenue and improve margins.
  
• Strong cash flow generation, underpinned by strategic investments and operational efficiencies, will enable continued share buybacks and potentially increased dividends, supporting EPS growth.
  
• The projected growth in the IGT (Industrial Gas Turbine) sector due to rising electricity demand from AI, data centers, and cryptocurrency mining is expected to contribute to revenue expansion and margin improvement beyond 2025.

Howmet Aerospace Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Howmet Aerospace's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.8% today to 19.8% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $4.53) by about December 2027, up from $1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.8x on those 2027 earnings, down from 42.3x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.2x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Howmet Aerospace Future Earnings Per Share Growth

Risks

• Revenue in the Wheels business has declined due to weaker European market conditions and decreased demand in North America, which could continue to pressure overall company revenues.
  
• Reduced supply to Boeing amid the strike impacts near-term logistics and potentially revenue recognition, creating risk if such disruptions occur again.
  
• Uncertainty surrounding the pace of narrow-body aircraft production could affect Howmet's commercial aerospace revenue growth projections.
  
• Fluctuations in commercial transportation markets, especially in Europe and North America, might continue to negatively impact wheels segment earnings and profitability.
  
• Execution risk related to capacity increases and the need for additional workforce training could impact margins and operating efficiency.

Valuation

• The analysts have a consensus price target of $123.87 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 $144.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.4 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 6.2%.
• Given the current share price of $111.93, the analyst's price target of $123.87 is 9.6% 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.