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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