Supply Chain Delays Will Challenge Airbus Production But Open Opportunities

Key Takeaways

• Hexcel's revenue and profitability are under pressure due to supply chain delays and reduced operating leverage in aerospace production.
  
• Tariff uncertainties and delayed aircraft production rates may impact Hexcel's cost structure and financial recovery.
  
• Securing long-term contracts and growth in aerospace and defense sectors enhance Hexcel’s revenue potential, while strong cash flows and tariff strategies support profit 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 revenue growth is at risk from lower-than-expected commercial aerospace production rates due to ongoing supply chain issues, which are causing delays in production ramp-ups, especially for models like the Airbus A350. This lower demand will likely result in revenues not meeting consensus expectations.
  
• The company is experiencing a reduced operating leverage because production levels remain below peak capacity, which negatively impacts net margins as fixed costs are spread over fewer sales, potentially leading to lower profitability.
  
• Tariff uncertainties pose a risk, with potential direct impacts on Hexcel's cost structure estimated at $3 to $4 million per quarter, affecting net margins negatively if these costs cannot be passed to customers.
  
• Boeing's delayed rate increases for aircraft models such as the 787, combined with Hexcel's assumption of the 737 production remaining in the low 30s per month, may slow potential revenue recovery, impacting earnings and cash flow expectations.
  
• Hexcel may see further financial strain if European and U.S. defense programs do not ramp up as anticipated, impacting projected growth and causing defense sales to underperform relative to optimistic market growth estimates.

Hexcel Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hexcel compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hexcel's revenue will grow by 6.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.6% today to 11.3% in 3 years time.
• The bearish analysts expect earnings to reach $258.9 million (and earnings per share of $3.39) by about July 2028, up from $124.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, down from 40.4x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 35.1x.
• Analysts expect the number of shares outstanding to decline by 1.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Hexcel Future Earnings Per Share Growth

Risks

• Hexcel's successful positioning in the aerospace industry as a key supplier could lead to increased revenues as demand rebounds, especially with the expected production ramp-ups from major customers like Airbus and Boeing.
  
• The company holds sole-source life-of-program contracts on many commercial aircraft programs, securing future revenue streams and contributing positively to earnings.
  
• Hexcel's strong cash generation capability and low capital expenditure needs due to previous investments lay a foundation for robust future cash flows, enhancing its net margins.
  
• Growth opportunities in the defense sector, with increased spending forecasted from the U.S. and European governments, can bolster Hexcel’s potential revenue and earnings.
  
• The company's adept handling of foreign exchange exposure and strategic tariff management mechanisms may mitigate potential financial impacts, preserving profit margins.

Valuation

• The assumed bearish price target for Hexcel is $52.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hexcel's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $71.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $258.9 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of $62.6, the bearish analyst price target of $52.0 is 20.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.