1 Stock I'm Watching but Won't Buy Yet

Boeing 787. Image source: Boeing. 

Buying a stock at just the right time can be tricky. You don't want to buy a stock just to see it fall the next day, but you don't want to pass on a stock just to see it later rise.

Luckily, long-term investors don't need to worry as much about timing. Long-term investors are looking for a stock that offers promise over the next five to 10 years. Of course, that doesn't mean they don't want a great deal. So, with that in mind, let's look at Hexcel (HXL 0.51%).

The allure of composite
When you think of aerospace/defense companies, you probably picture companies like Boeing or Lockheed Martin. This is understandable; Boeing makes popular planes like the 787 Dreamliner, and Lockheed Martin is the prime contractor for the F-35 fighter jet. However, what you may not realize is that without Hexcel, both the Dreamliner and the F-35 wouldn't be where they are today.

F-35. Image source: Lockheed Martin via Northrop Grumman.

Why? Hexcel supplies the composite material for both the Dreamliner and the F-35. 

In fact, when it comes to the Dreamliner, Hexcel invented and certified hundreds of composite parts for the jet using a new product called HexMC. This allowed Boeing to use composite material in place of metal, thus making the Dreamliner lighter and easier to repair. Furthermore, the Dreamliner and the F-35 aren't the only big contracts under Hexcel's belt. According to Hexcel's 2014 Annual Report, 66% of Hexcel's net sales come from commercial aerospace, including composite material contracts for planes like Airbus' A350 XWB and A320neo, as well as for Boeing's 737 MAX.   

In contrast, only 20% of Hexcel's net sales are due to space and defense sales -- but that still includes supplying composite material to high-profile contracts like the F-35, the Blackhawk and Apache helicopters, the V-22 Osprey tilt rotor aircraft, and the F/A-18E/F Super Hornet fighter jet. 

More important for investors, Hexcel's profits are on the rise. Consider the following:

Source: Hexcel's 2014 Annual Report. 

As you can see from the above table, Hexcel has seen consistent increases in net sales, operating income, and diluted EPS since 2010. Furthermore, 2014 was a record sales year thanks to a build-rate increase for the above commercial planes, according to Hexcel. 

More good news
The above isn't the only good news when it comes to Hexcel; it stated in its 2014 annual report, "Each new generation of commercial aircraft has used increasing quantities of advanced composites, replacing metals. This follows the trend previously seen in military fighter aircraft where advanced composites may now exceed 50% of the weight of the airframe." Simply put, as aircrafts become more advanced, they use more composite material. 

IndiGo celebrated its ninth birthday by firming up an order for 250 Airbus A320neo (new engine option) jetliners. Source: Airbus.

Hexcel points out that the Boeing 707, which was developed in the 1950s, contained almost no composite materials; the 767 that entered service in 1983 had approximately 6% composite material; the 777 that entered service in 1995 had 11% composite material; and the Dreamliner has more than 50% composite material. 

Add to that the fact that Boeing projects a need for 38,050 airplanes globally over the next 20 years at a value of more than $5.6 trillion, the fact that Boeing and Airbus are the two top suppliers of commercial aircraft, and that Hexcel is a supplier for both, and you're looking at a company with a promising future.  

Time to buy?
All of these factors are enough to get me to watch this stock. However, as of this writing, Hexcel is trading at $53.77 a share, barely below its 52-week high of $54.50 a share. This, in my opinion, is a little high, which is why I'm not ready to buy just yet. If, however, the price moves to $51 a share or lower, I will probably add this stock to my portfolio, as I think it has great long-term potential.