Hexcel Earnings: Investing to Meet Growing Demand for Jets

Incorporating narrow-moat Hexcel’s HXL third-quarter results into our forecast, we reaffirm our $63 fair value estimate.

Commercial aerospace, by far the company’s biggest market, delivered 20.5% revenue growth since last year with increased deliveries of Airbus A350s and Boeing 787s, followed by space and defense, which saw revenue grow 18.6% as F-35 deliveries reaccelerated. Both markets experienced a few percentage points of decline in operating margin, which the company attributes to investing in hiring and facilities to be able to meet oncoming growth in orders from both markets. We see the phenomenon as temporary, even necessary, as it is inherent in Hexcel’s role as a top-tier supplier to Airbus, Boeing, and the defense market to invest ahead of scheduled increases in production rates.

The company’s industrials unit—which has seen long-term declines in revenue as the market for wind turbine blades has come under pressure—is now more exposed to luxury vehicles, which we see as likely more attractive, though not offering the distinct competitive advantage that Hexcel’s activity in aerospace and defense provides.