Boeing (BA +5.40%) CEO Dave Calhoun recently told the investment community that composites will play a significant role in the company's development of airplanes. That's excellent news for composite manufacturers like Hexcel (HXL +2.95%) and highlights the investment case for the composite specialist.
That said, is it enough to make the stock a buy considering that Boeing and Airbus (EADSY +2.58%) aren't planning to develop a new plane anytime soon? Here's what you need to know.
The investment case for Hexcel
The company is a leader in lightweight composite technology. Composites have a weight and strength advantage over traditional metals, meaning they can reduce operating costs and increase the durability of heavy equipment like airplanes, satellites, and wind turbines.
Hexcel's largest end market is commercial aerospace, generating 59% of sales in 2022, with significant content on Boeing and Airbus aircraft and larger business jets. Space and defense comprises 29% of sales, and the industrial segment (including composites for wind turbines) contributes 12%.
The case for buying the stock is relatively simple to understand:
- Boeing and Airbus are both aggressively ramping up airplane production, and that means increased sales for Hexcel composites.
- Newer airplane models tend to contain more composites, so Hexcel can grow revenue even if the amount of airplanes produced merely stays the same.
- The increasing adoption of composite technology means Hexcel can grow in its noncore space and defense business, industrial markets, and business jets.
Boeing plans to increase production of its 737 MAX from 31 planes a month to 50 between 2025 and 2026. Meanwhile, the production rate of its wide-body 787 Dreamliner is expected to ramp up from 3 a month at present to 10 a month in the same time frame.
Similarly, Airbus plans to ramp up its production, with its flagship A320neo moving to a rate of 65 a month by the end of 2024 and 75 a month in 2026, from 43 a month in 2022.
NYSE: HXL
Key Data Points
For a flavor of how increasing production, and increasing production of newer planes, helps Hexcel's growth, consider that its content per plane on the older 737 variants is around $300,000 compared to $400,000 on the 737 MAX.
Similarly, the older A320 generates $300,000 per plane for Hexcel, compared to $450,000 on the A320neo.
The bad news
It's slightly disappointing that there won't be a new airplane coming from Airbus or Boeing in the near future. Not least because, as discussed above, newer airplanes tend to contain more composites. Therefore, bringing forward the development of new planes spells nearer-term revenue for Hexcel.
Airbus is aiming to develop a hydrogen-powered commercial aircraft by 2035, and Calhoun shelved plans for a new midsize airplane (NMA) when he took over as Boeing CEO in 2020. And he has made it clear Boeing won't have a new airplane in place before 2035.
The good news
That said, Calhoun's commentary on composites being an integral part of future airplane development and the company using its experience on the composite-rich 787 programs ($1.4 million in content per plane for Hexcel), shores up confidence in long-term demand for the industrial company.
While 2035 might seem a long time away, Hexcel has a growth opportunity from the ramping up in the 737 MAX and A320neo production and the outsize prospects from growth in composite widebody production.
Meanwhile, larger business jets such as General Dynamics' (GD +2.36%) Gulfstream brand and Dassault's (DASTY +0.94%) Falcons have content in the range of $200,000 to $500,000 per plane for Hexcel. In addition, there's an opportunity from wind turbines and reengineering newer aircraft, as well as the parallel market of space and defense.
Image source: Getty Images.
A stock to buy?
Ultimately, as Calhoun alludes to, the decision to go for composites in new plane development spells tremendous long-term growth at Hexcel, and the stock remains highly attractive for long-term investors. The current valuation (37 times estimated 2023 earnings) might seem superficially high.
Still, Wall Street analysts are expecting mid-teens percentage growth in earnings from 2023-2025. And the multiyear backlogs at Boeing and Airbus and other drivers discussed above ensure growth for many years to come.
