One area where I’m seeing strength returning to is the aerospace industry, and there’s also been plenty of evidence of a solid outlook for the auto sector. I have an opportunity to tell you about that provides great exposure to these trends but in a more conservative play that places an emphasis on predictable growth.
Hexcel (HXL) focuses on the technology aspect of aerospace, industrial and auto industries as they seek to do more with less – less material, that is. Its game-changing technology has actually been around a while, but is getting renewed attention and acceptance in industries where cost and fuel efficiencies are of great importance.
The company makes composite materials, focusing on lightweight and durable products, especially carbon fibers. Simply put, carbon fiber is made up of thin, crystalline filaments that are chemically bonded together to make “twists” of material that have twice the comparable strength of steel, yet weigh two-thirds less.
A report from netcomposites.com earlier this year found that global carbon fiber demand will grow from 46,000 tonnes in 2011 to as much as 140,000 tonnes in 2020 (a tonne is equivalent to 0.90 of a U.S. ton, which is in turn 2,000 lbs). Of that tally, as it stands today, industrial applications are 67% of demand, followed by aerospace and defense at 17%.
But by 2020, some new, emerging applications will account for a large chunk of demand: wind energy and automotive applications will make up nearly half of global demand.
While it currently only makes up about 6% of the global market, Hexcel is one of the few publicly-traded companies in this space. It is also the most attractively valued and is in a great position to benefit from that kind of anticipated growth.
Exploring New Growth Areas
The company’s business is fairly evenly split between the United States (46%) and Europe (43%). Hexcel gets 63% of its revenues from commercial aerospace customers, including industry leaders Airbus and Boeing (BA), which are a solid 85% of HXL’s segment. The company’s carbon fiber makes its way into the Boeing Dreamliner’s window and door frames, and provides similar construction materials to Airbus’ A380 and A350 planes.
It’s also interesting to note that the company already garners $1.5 million to as much as $3 million per plane from these two customers, and management has said that Hexcel could top $5 million per plane for the recently introduced Airbus A350.
Aerospace and defense makes up another 23% of sales, and the remainder is tied to industrial applications, which includes the automotive industry – an emerging area for HXL. There are limits to how efficient engines can be made or how clean fuels can be, so reducing the weight of the machinery itself offers a way to increase efficiency. Carbon fibers help fill that need, finding their way into doors, roofs and dashboards and the frame of the car itself. This segment will likely see strong growth over the near term as more auto manufacturers are looking to reduce the cost (and pricing at retail) of fuel-efficient cars.
The company has managed to grow revenues at a compound annual rate of more than 11% since hitting a low of $1.1 billion in its top line in 2009, emerging slowly but surely from the recession. Along that timeframe, operating income has grown 26% a year, as margins grew from less than 10% to a recent 16%. That operating margin is likely to keep growing as the company looks to control costs.
For Hexcel, it’s all about future growth, and recent comments underscore commitment and visibility of both top and bottom line growth. Management said recently that their 2014 revenues should be $1.80-$1.88 billion and earnings should be $2-$2.11 a share.
That’s broadly in line with the top-line consensus of $1.84 billion and just a little shy of the $2.12 EPS estimate, which is tied to a tax rate projected by Hexcel that may be a little higher than Street analysts expect. Management also reiterated that the company is on track to reach its 2017 sales target of $2.5 billion, and that continued strength in the aerospace industry has offset some softness in the industrial markets.
With signs pointing to a firming U.S. economy and even some indications that Europe may also be turning the corner, it’s possible that Hexcel is being conservative in its guidance and it could be raised as we move through 2014. Since the market usually looks ahead a few years, I think the company could earn as much as $2.65 a share in 2015, on revenues of $2.1 billion.