Hexcel Corporation: A Specialized Composites Supplier Tied to Growing Demand for Jets

We are picking up coverage of Hexcel Corporation HXL with a narrow economic moat rating and $63 per share fair value estimate, making the shares fully valued at recent prices. Half of Hexcel’s revenue comes from providing carbon fiber composites to Boeing and Airbus as parts for their range of jets. It shares the market with Solvay and Toray, though Hexcel is more heavily specialized in aerospace, which confers its competitive advantage because switching costs are higher in aerospace than other industries.

We see strong growth in demand for aircraft over the next 20 years as older planes are replaced with new, more-efficient models and as middle-class consumers in emerging markets demand more air travel. Hexcel’s ongoing process improvements and learning from repetition promise margin expansion as it delivers more of each set of parts—we see operating margins almost doubling in 10 years from 11.1% in still pandemic-depressed 2022 to over 21%, surpassing its 2015-19 average of 17.7%.

Hexcel also provides parts of many military aircraft, including the F-35 fighter, where it also benefits from its specialization toward concentrated customers in the defense industry that rarely switch suppliers once an aircraft enters production. Defense provided around 30% of Hexcel’s revenue in 2022, but we expect this to approach 25% in coming years as commercial jet production continues to rebound and grow.

Around 13% of Hexcel’s 2022 revenue came from a smattering of other industries like wind farms and outdoor recreation, and we don’t see these activities mattering much to the company’s moat or future profits.