Hexcel Continues To Execute Well Through A Challenging Period Ahead Of A Widebody Production Ramp

Hexcel (NYSE:HXL) is one of those frustrating situations where I have a lot of regard for management and see significantly improving financials in the future, but where the share price today seems to already reflect those positives. I thought the same almost seven months ago, though, and that hasn’t kept the shares from rising about 15% since then, handily outperforming most of the company’s customer base and many other aircraft component suppliers.

Hexcel has done better than I expected on margins ahead of reacceleration in widebody production, but that outperformance doesn’t drive a big enough change in my model to fundamentally alter my valuation view. If you’re the type of investor who is less sensitive to valuation and more confident that the shares can see another run as widebody activity accelerates, there’s a case to be made for the shares. For me, though, I need a line of sight on better long-term financials or a lower entry price.

 

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Hexcel Continues To Execute Well Through A Challenging Period Ahead Of A Widebody Production Ramp

Hexcel Needs To Offer More Than Just A Widebody Recovery Story

 

Ahead of what may well strike some readers as a negative review of Hexcel (HXL), I want to be clear about one thing from the outset – I think Hexcel management has done a good job here. I do think there are some significant issues that investors have to consider, and some real challenges ahead for management, but when it comes to operating the core business, I don’t really have a lot of complaints.

That said … Hexcel is very much tied to the recovery in the widebody aircraft market, and though I view that as a “when, not if” question, I think the value of that recovery is already reflected in the shares. I thought the same at the time of my last update, and the shares are about 13% lower now. In my view, for the stock to offer really appealing long-term potential, the management must find new markets/offerings for growth.

 

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Hexcel Needs To Offer More Than Just A Widebody Recovery Story

Hexcel Has Bounced On Bullish Aerospace And Commodity Sentiment

 

When I last wrote about Hexcel (HXL) in January of this year, I underestimated the potential tailwind the shares could get from a further sentiment shift back toward later-cycle recovery stories (like aerospace) and material plays in an inflationary environment. With that, the shares have risen nearly another 40%, underperforming a few other aero plays like Spirit AeroSystems (SPR) and Universal Stainless (USAP), but outperforming names like Carpenter (CRS), HEICO (HEI), and Woodward (WWD).

At this point I don't think Hexcel shares offer a particularly attractive long-term return, but I fully acknowledge that cyclical stocks overcorrect on both ends of the cycle, and the outlook for the company's commercial aerospace business (especially the wide-body business) should only improve from here.

 

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Hexcel Has Bounced On Bullish Aerospace And Commodity Sentiment

Hexcel's Price Anticipates The Eventual Recovery

Market sentiment is a funny thing. About six months ago, I was making the case for stocks like AerCap (NYSE:AER) and Copa (NYSE:CPA) on the basis of Wall Street significantly overestimating the long-term damage to the airline and aerospace sectors and underestimating how willing people would be to travel again once they were allowed to do so. Now, since the election and the launch of effective COVID-19 vaccines, it seems like I have to shift the other way and point out that while those sectors will recover, it is still going to take time.

Specific to Hexcel (HXL), these shares have moved up about a third since my last update on the company, more or less keeping pace with other suppliers like Howmet (NYSE:HWM) and Woodward (NASDAQ:WWD), while lagging Spirit (NYSE:SPR) and outperforming Airbus (OTCPK:EADSY) and Boeing (NYSE:BA). I do believe that Hexcel's business is bottoming out, and I see no real risk that the business won't survive this downturn. Still, unless there's a stronger/quicker re-acceleration in widebody build-rates than I currently expect, I feel like Hexcel is a little ahead of itself in the mid-$40's.

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Hexcel's Price Anticipates The Eventual Recovery

Destocking And High Fixed Operating Leverage Hammer Hexcel

When I wrote about Hexcel (NYSE:HXL) after second quarter earnings, I thought the shares weren’t so attractive as the rally in the shares had largely captured the “it’s really not that bad” trade, but I didn’t expect what third quarter earnings had in store. Turns out, it really is that bad, but it just took a little longer to come through in the financials. Some of this was probably anticipated in the steady decline of the share price from the mid-$40s starting back in June, and the 6% decline on Tuesday was a somewhat restrained reaction.

With no guidance from management, at least a couple more quarters of serious destocking, significant decremental margins, and no real reason to expect a near-term upturn in widebody aircraft builds, it’s going to be tough to build a bull argument on these shares. I think there’s an argument to be made for a fair value in the mid-$30s (around where the shares are today), but with minimal leverage to aftermarket revenue opportunities, not enough space/defense exposure to really matter, and no clarity on the near-term outlook, I’d want a pretty good discount to that mid-$30s target before taking the plunge.

 

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Destocking And High Fixed Operating Leverage Hammer Hexcel

The Next Couple Of Years Will Be Rough For Hexcel

Going into 2020, aerospace looked like one of the best markets to be in, and one of the relatively few markets where there really weren’t worries about underlying demand. In a few short months, Covid-19 has brought air travel to a standstill, threatened the survival of multiple airlines, and thrown the commercial aerospace market into chaos. As a supplier of advanced composites used in a range of aerospace applications, there’s really no place for Hexcel (HXL) to hide, and the next couple of years are going to be rough for this company.

Few companies offer up an easy modeling exercise today, but modeling Hexcel is complicated by the uncertainties regarding how the airline market will recover. Most likely, domestic demand will recover before international, driving a faster recovery in narrowbody aircraft versus the widebody aircraft where Hexcel is stronger. With that, I’m expecting it to take about five years for Hexcel to regain 2019 levels of revenue and cash flow, but patient and very risk-tolerant investors may yet want to take a look here.

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The Next Couple Of Years Will Be Rough For Hexcel

Investopedia: Will This Aerospace Cycle Finally Let Hexcel Take Off?

It may sound contradictory, but Wall Street is often both predictive and reactive. To that end, the stock of carbon fiber specialist Hexcel (NYSE:HXL) has done pretty well since 2009 on the basis of investor expectations for more composite material content in commercial aerospace. At the same time, though, it's well worth remembering that Hexcel has struggled to deliver consistent, impressive margins and returns on capital. If Hexcel can't find a way to establish better peak earnings and cash flow potential, it may be difficult for these shares to outperform.

Please click below for more:
http://www.investopedia.com/stock-analysis/2012/Will-This-Aerospace-Cycle-Finally-Let-Hexcel-Take-Off-HXL-BA-CYT-GE1214.aspx

Investopedia: Can Zoltek Keep The Wind At Its Back?

Here's a little secret for investors looking to take big swings at potential multi-baggers: seek out small, poorly-followed, heavily-shorted stocks in out-of-favor industries. Pick the right one at the right time and the gains can be tremendous. That was shown yet again last week as carbon fiber producer Zoltek (Nasdaq:ZOLT) obliterated analyst expectations and reignited hopes that wind power and green power stocks may have a better 2012 in store.

Great Results Across the Board 

Zoltek is followed by just three analysts, and we're not exactly talking about Morgan Stanley or Barclays here, so "beating expectations" has to be taken with a grain of salt. Still, Zoltek reported that revenue rose 43% from last year and blew away the revenue estimate by 30% as the company saw a 33% jump in shipment volume.

To read the full article, click the link:
http://stocks.investopedia.com/stock-analysis/2012/Can-Zoltek-Keep-The-Wind-At-Its-Back-ZOLT-AMSC-HXL-GE0208.aspx

Recovery? Specialty Chemicals Lead The Way

Although consumers are not necessarily feeling much better yet, the recovery in the industrial side of the economy seems to be real. Over the last week or so, we have seen several large industrial concerns report strong earnings and cautiously optimistic guidance. Turning to one of the basic feed stocks of industry, specialty chemicals, we see a similar trend at work. Let's take a look at some of the top-performing
companies in this sector.

Albemarle
Albemarle (NYSE:ALB) is mostly a niche producer of specialty chemicals, but do not be fooled into thinking that "niche" is somehow a bad word. Albemarle is a leading producer of refinery catalysts, fire retardants and pharmaceutical inputs and those can be lucrative segments.

For the complete article, please go to:
http://stocks.investopedia.com/stock-analysis/2010/Specialty-Chemicals-Looking-Special-ALB-RPM-HXL-CYT-DD-DOW-BA0728.aspx.

A Few Fruits From This Week's Research

When you're a stock junkie (to say nothing of a financial writer), you're pretty much always doing stock research. Sometimes you go a while before finding good ideas, and then sometimes you find them in bunches.

This week turned up a few interesting tidbits, as I was looking mostly at the chemicals sector.

Goodyear (GT) - Analysts seem to like this one, and it was up more than 10% in the past week. But a tire company? Really? Sure, the EV/EBITDA ratio isn't bad, but this company's historical ability to produce real returns (ROIC) isn't very good.

Aceto (ACET) - I like the idea of a company that makes the chemical underpinnings of pharmaceuticals, particularly generics. By and large, these guys don't mess with the legal patent wrangling like a TEVA. The EV/EBITDA is on the high side, but this one looks interesting.

Calgon Carbon (CCC) - Wow. Great business and decent returns on capital, but a pretty poor long-term record of growth and doesn't look at all cheap to me (though the analysts seem to like it well enough).

Hexcel (HXL) - Nice story (carbon fiber for Boeing and Airbus), but I can't even get close to making this one work on a valuation basis.

Lubrizol (LZ) - Am I the only one who didn't know this company was producing double-digit ROICs, good growth, and a strong free cash flow yield? Unfortunately, as much as the company looks like a winner, the stock seems to be there already.

Metabolix (MBLX) - You either win big or lose big. It's a nice idea, making plastics out of corn, switchgrass, and the like, but valuation is an exercise in faith. Treat it like a biotech. I probably should go back and double-check the IP here, because that will be the real deciding factor.

Methanex (MEOH) - I was shocked at how cheap this one looks when I value it by a forward EBITDA basis. It's been a volatile commodity business in the past, but they have a lot of unused capacity (good for margins if volumes go up) and China seems poised to use a lot more methanol.

Sigma Aldrich (SIAL) - Great company. No bargain in the stock, though.

Huntsman (HUN) - Hmmm. This one could be interesting. It's a diversified chemicals business, but a little less commoditized than your average commodity business. This one could be worth a closer look.

Landec (LNDC) - This was a popular "little known" growth stock a few years ago. It was supposed to be a company that "looked like a commodity business, but really wasn't". Guess what? It was. At least enough to knock the wind out of its sales. I'm intrigued, though, and if my numbers are right this could be a cheap one.

And so ends the gleanings from this week's research. There were a lot more names I looked at, but I feel like 10 at a time is about all anybody wants to read about.

Happy hunting!