Airbus And Boeing Production And Defense Spending Will Create Value

Key Takeaways

• Defense spending increases in the U.S. and Europe offer growth opportunities for Hexcel through its established defense contracts, boosting potential revenue.
  
• Hexcel's strategic cost management and share repurchases aim to improve net margins and enhance EPS, backed by strong cash generation.
  
• Supply chain disruptions and demand shortfalls in key aerospace programs are harming Hexcel's revenue, gross margins, and overall earnings.

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 is poised to benefit from the anticipated increase in production by Airbus and Boeing, with expected incremental annual sales of $0.5 billion from existing contracts, impacting future revenue.
  
• The company holds sole-source life-of-program contracts across numerous commercial aircraft programs, ensuring stable revenue streams as production increases.
  
• Defense spending by the U.S. and European governments is expected to rise, providing growth opportunities and potential revenue boosts for Hexcel due to its established presence in defense contracts.
  
• Hexcel's strategic focus on cost management, including material usage efficiencies and optimized sales, inventory, and operations planning, indicates potential improvement in net margins.
  
• The company's ongoing share repurchase program and strong cash generation capacity, supported by existing contracts and controlled capital expenditures, suggest a strategy aimed at enhancing EPS through buybacks and effective financial management.

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 6.6% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $266.1 million (and earnings per share of $3.51) by about May 2028, up from $124.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $234 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, down from 32.6x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 3.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Hexcel Future Earnings Per Share Growth

Risks

• Ongoing supply chain disruptions are leading to delayed rate ramps across Hexcel's commercial aerospace customers, notably affecting production rates for the A350 and potentially influencing future revenue and profitability.
  
• Lower-than-expected commercial aerospace demand, particularly from programs like the Boeing 787 and Airbus A350, is contributing to a decline in revenue and gross margin deterioration, affecting overall earnings.
  
• Tariffs, albeit minimal in direct impact, introduce uncertainties that could influence the wider aerospace supply chain and OEM production rates, potentially affecting revenue projections and operating costs.
  
• The delay in ramping up production rates for key aerospace programs, such as the Airbus A350, by major customers can lead to reduced sales volumes, negatively impacting revenue and gross margins due to lower cost absorption.
  
• Vendor quality issues and unfavorable sales mix in the Engineered Products segment have deteriorated gross margins, leading to lower operating income and affecting net margins.

Valuation

• The analysts have a consensus price target of $58.091 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 $76.0, and the most bearish reporting a price target of just $48.31.
• 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 $266.1 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of $50.5, the analyst price target of $58.09 is 13.1% 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.