Incorporating AI And Automation Will Improve Production Efficiency Over Time

Key Takeaways

• Hexcel's focus on high-margin aerospace applications and factory automation could enhance net margins and production efficiency.
  
• Leveraging current capacity without major expenditures may boost free cash flow and earnings amidst aerospace sector growth.
  
• Persistent supply chain disruptions, market weaknesses, and elevated costs threaten Hexcel's revenue growth, margins, and earnings if not strategically managed.

Catalysts

Develops, manufactures, and markets carbon fibers, structural reinforcements, honeycomb structures, resins, and composite materials and parts for use in commercial aerospace, space and defense, and industrial applications.

• Hexcel's growth potential is supported by the expected rebound in commercial aerospace production, as OEMs like Boeing and Airbus increase their production rates, providing a significant opportunity to increase revenue.
  
• The divestiture of Hexcel's lower-margin Neumarkt, Austria site and Hartford 3D printing business may improve net margins by allowing the company to focus on high-margin aerospace applications.
  
• Hexcel plans to leverage current capacity without substantial capital expenditures, which is expected to boost free cash flow and earnings by better utilizing existing production facilities.
  
• Long-term growth opportunities could arise from their position as the only vertically-integrated U.S. corporation providing advanced composite materials to Space & Defense, helping to sustain revenue growth and profitability.
  
• Hexcel's focus on future factory initiatives, incorporating AI and automation, aims to improve production efficiency and lower manufacturing costs, potentially enhancing net margins over time.

Hexcel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hexcel's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 10.5% in 3 years time.
• Analysts expect earnings to reach $249.2 million (and earnings per share of $3.26) by about January 2028, up from $132.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $279.3 million in earnings, and the most bearish expecting $214.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2028 earnings, down from 41.0x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 34.0x.
• Analysts expect the number of shares outstanding to decline by 1.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

Hexcel Future Earnings Per Share Growth

Risks

• Hexcel's divestiture from its Neumarkt, Austria site and Hartford, Connecticut 3D printing business could lead to short-term financial impacts due to restructuring charges and the adjustment of sales forecasts, affecting net margins and earnings.
  
• Persistent supply chain disruptions and labor challenges faced by OEMs, which continue to dampen production levels, could hinder expected revenue growth and net margins if not resolved.
  
• Weakness in the industrial market, particularly the decline in wind and automotive sub-markets, poses a risk to revenue growth, especially if competition from Chinese automakers continues to exert pressure on pricing.
  
• Currency exchange rate fluctuations pose a risk to Hexcel's revenue and profitability, as movements in the strong U.S. dollar can impact international sales unless well managed through hedging strategies.
  
• Elevated R&D expenses and headcount costs, without proportional revenue recovery, may reduce operating margins, impacting net earnings until sales substantially recover and provide operating leverage.
  ```

Valuation

• The analysts have a consensus price target of $71.59 for Hexcel 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 $87.0, and the most bearish reporting a price target of just $57.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $249.2 million, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $66.85, the analyst's price target of $71.59 is 6.6% 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.