Innovative Materials And Decisive Focus Propel Aviation Growth And Margin Expansion

Key Takeaways

• Innovation in lightweight composites and a strong aircraft backlog could drive future revenue and margin growth as aircraft production rises.
  
• Strategic focus on defense and divestitures in non-core markets may optimize market position and enhance net margins.
  
• Supply chain issues and program wind-downs create revenue instability, while uncertainty in demand affects investor confidence and production costs pressure margins.

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 focus on innovation and investment in lightweight composite materials for new-generation commercial and military aircraft could drive future revenue growth as aircraft manufacturers increase production rates.
  
• The robust backlog of nearly 15,000 aircraft from Airbus and Boeing indicates significant future demand for Hexcel's products, potentially boosting revenue as production rates rise to meet this backlog.
  
• Hexcel's proactive workforce expansion and training initiatives could enhance operational efficiency and position the company to capitalize on production rate increases, potentially improving margins as costs are better absorbed.
  
• Strategic focus on the Defense and Space sectors, along with exploring divestiture options in non-core industrial markets, might optimize Hexcel's market focus and improve net margins by concentrating resources on higher-value opportunities.
  
• The company's strong cash generation and shareholder returns strategy, including significant stock repurchases, suggest potential for increased earnings per share (EPS) over time as capital investments remain low and cash is returned to shareholders.

Hexcel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hexcel's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $275.9 million (and earnings per share of $3.5) by about November 2027, up from $108.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $229.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.5x on those 2027 earnings, down from 44.0x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 34.3x.
• Analysts expect the number of shares outstanding to decline by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.31%, as per the Simply Wall St company report.

Hexcel Future Earnings Per Share Growth

Risks

• Supply chain disruptions, including shortages of engines, castings, seats, and landing gear, are causing delays in production rate increases, which could negatively impact Hexcel’s revenue and earnings.
  
• The need to carry excessive labor and overhead costs in anticipation of future demand due to a stop-start production environment presents a near-term headwind to margins and profitability.
  
• The withdrawal of previously issued midterm guidance indicates uncertainty in the demand and production forecasts, potentially leading to instability in revenue expectations and investor confidence.
  
• Industrial sales, which decreased by 17.3% compared to the third quarter of 2023, may face further challenges with strategic changes and plant divestitures, impacting revenue in this segment.
  
• The winding down of programs such as the V-22 poses a headwind for Space & Defense revenue, which makes up a significant portion of Hexcel's sales, potentially affecting earnings stability and growth.

Valuation

• The analysts have a consensus price target of $69.12 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 $78.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.4 billion, earnings will come to $275.9 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 6.3%.
• Given the current share price of $58.78, the analyst's price target of $69.12 is 15.0% 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.