Where is Hexcel Corp. Heading, and How Important is Boeing to Its Future?

Hexcel (NYSE: HXL  )  is a manufacturer of structural materials used in the aerospace industry. The company offers carbon fibers, honeycomb parts, matrix systems, adhesives, and more. In the past 52 weeks, the stock has risen more than 20%. If earnings growth continues, the company's stock will follow. For a series of reasons, I believe Hexcel has positioned itself to capitalize on numerous opportunities. 

Past performance and current situation
Hexcel has great fundamentals and successful operations, which have led it to decent success. The chart below shows that while Hexcel has hit a few bumps along the way, its performance over the last 10 years has been impressive. 

HXL Net Income (Annual) data by YCharts.

This upward trend is driven by a few factors. First. since its founding in 1946, Hexcel has developed into a company that produces top-notch technology. Also, the company has a geographically diversified business: in 2013, 46% of sales were in the U.S., 39% in Europe, and 15% elsewhere. The company today collects 65% of its revenue from the commercial aerospace market, with a particular reliance on key customers such as Boeing (NYSE: BA  ) . According to the company's most recent 10-K, 34% of 2013 sales came from Boeing. A strong relationship with a major player in the industry is a good thing, but the results would be catastrophic if the relationship with Boeing was damaged. Still, as long as Hexcel maintains tight relationships with Boeing, Airbus, and other major customers, growth should continue. 

Competition
One of Hexcel's most notable competitors is Cytec Industries (NYSE: CYT  ) , a specialty materials company that relies on the aerospace industry for 50% of sales. Cytec also relies heavily on Airbus and Boeing, but not to the extent that Hexcel does. About 20% of 2013 sales were to Boeing. Let's examine the overall performance of these companies over the trailing 12 months:

  Hexcel Cytec
Revenue 1.72B 1.95B
Operating cash flow 273.10M 138.10M
Profit margin 11.28% 9.96%
Debt to equity 0.3046 0.5761
Return on equity 17.87% 14.71%

At a quick glance, Hexcel seems to have the slight edge over Cytec. But these companies are remarkably similar in terms of size, profitability, and financial health. Neither is necessarily in a position to pull far ahead of the other. They will continue to compete for business from Boeing and Airbus, but Cytec is not likely to have a significantly detrimental impact on Hexcel's business. 

Sources of growth for each segment 

Industrial
Hexcel is least reliant on revenue from this segment, which provides about 13% of revenue. Although the segment hasn't been doing terribly, it isn't growing much, either. Hexcel makes money from wind energy, recreation, tooling, and transportation. As shown by the chart below, growth has been stagnant, with revenue bouncing around for a number of reasons over the past decade. It reached an all-time high of $313 million in 2008 before falling to $218 million by 2010 as a result of the recession. This segment's recovery has been slow and troubled, but it stands to benefit if macroeconomic conditions continue to generally improve. For now, Hexcel seems to be waiting for the global wind energy market to pick up. Depending on the company's ability to capitalize on that opportunity, this segment could see a turnaround within the next few years.

Source: Investor Presentation.

Space & Defense 
The company derives about 22% of its revenue from this segment, which has delivered a compound annual growth rate of 6.7% since 2005. In 2013, it brought in $376 million in revenue. The segment has had no shortage of work, now encompassing over 100 active programs including helicopters, transport aircraft, fighters, and launch vehicles. Just like the overall business, this segment has some geographical diversification, with over a third of sales coming from outside the U.S. The largest program is currently for the V-22 Osprey, but that still makes up less than 15% of sales for the segment. As the economy continues to improve, government spending on these types of programs is likely to increase, leading Hexcel to greater profits. In the meantime, the existing programs should keep this segment busy and prosperous.

Commercial Aerospace
The commercial aerospace segment is the main driver of revenue, bringing in 65%. As illustrated by the chart below, this segment is in a strong upward trend. 

Source: Investor Presentation.

With these types of growth rates, it can be hard to continue to reach the market's expectations. But a number of catalysts should drive company revenues higher. The combined backlog for Boeing and Airbus already encompasses an astonishing 10,000-plus planes. According to Hexcel's investor presentation, this is about eight years of work. The main risk this segment faces is losing business from either Boeing (46% of segment revenue) or Airbus (39%). This, though, is unlikely considering that Hexcel is still providing high-quality products to these companies at a growing rate -- 2013 was a record year for deliveries, and management expects 2014 to deliver another all-time high, according to the company's June 2014 investor presentation. As aircraft manufacturing continues to become more reliant upon composite materials, Hexcel stands to profit from increased build rates and new programs. This trend of composite reliance is illustrated by the following chart, which shows that composite materials are playing a continually larger role in the functionality of aircraft. As a result, Hexcel is profiting at a growing rate. One of the company's older aircraft programs, the Boeing 777, yields "only" about $1 million worth of materials from Hexcel per plane. The Airbus A350 program, for which Hexcel just received a contract, yields $5 million of materials per aircraft because the plane has more than 50% composite content by weight. 

Source: Investor Presentation.

Conclusion
Hexcel has industry trends on its side, and growth should remain impressive for at least a few years. Hexcel has a high-quality business model that features a strong relationship with Boeing, impressive profitability and efficiency, and seemingly bright futures for each operating segment.

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