Shares in UPS (UPS 0.69%), aerospace materials company Hexcel (HXL 4.38%), and security doors and locks company Allegion (ALLE +0.03%) have all experienced a significant dip so far in 2024, lagging behind the S&P 500 index's 14.6% gain over the same period. However, compelling evidence suggests that all three are positioned to outperform the market in the second half and beyond. Here's why.
The investment case for UPS stock
UPS, the package delivery giant, faced a tumultuous 2023, with some challenges spilling into the first half of 2024. Slowing economic growth has led to declining volume growth and revenue growth. A costly labor contract resolution further exacerbated the situation. To make matters worse, the prolonged labor negotiations led to customers diverting their deliveries to other networks, fearing a strike action.
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However, these headwinds will turn into tailwinds in the second half as management believes year-over-year volume growth will start in the second quarter in the U.S. Meanwhile, the cost increases due to the labor contract are now in the numbers, so comparisons with last year will get easier. UPS is making 12,000 job cuts in response to weaker demand.
Everything points to a stronger second half, and management's guidance calls for adjusted operating profit to increase by 20% to 30% in the second half compared to the same period in 2023.
The key to the turnaround and the metric investors should watch closely when UPS reports its second-quarter earnings on July 23 is a return to delivery volume growth in the U.S. Management previously said it expected slightly positive average daily volume growth in the U.S. in the second quarter. If it occurs, then UPS will be well on its way to a recovery in 2024.
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Hexcel investors are worried about Boeing
There's little doubt that Hexcel has great long-term growth prospects. Its advanced composites offer a weight and strength advantage over traditional materials like aluminum. That's a big issue in aerospace as it helps optimize fuel consumption and reduce lifecycle operating and maintenance costs, particularly on widebody airplanes.
As such, there's a clear trend of new airplanes using more advanced composite materials. Meanwhile, Boeing and Airbus have multiyear backlogs and are looking to ramp up production. Everything points to a bright future for Hexcel.
That said, there will be some near-term turbulence in 2024, and that's why the company's stock has declined.
In a nutshell, since there's little aftermarket demand for Hexcel's products, when airplane deliveries slow at one of its ultimate end market customers, in this case, Boeing, Hexcel could feel it in its orders. Unfortunately, the slowdown at Boeing is creating uncertainty, and investors are concerned. Moreover, Hexcel has been building its infrastructure to support future solid growth, holding back near-term profit margins.
Putting it together, it's understandable that investors might have concerns. Still, these are near-term issues, and Boeing will surely ramp up its airplane production rate in the second half and increase it in the future. As such, investors in Hexcel can look forward to an ongoing recovery in sales and margin growth in the coming years.
Allegion secures the future
The security door and lock maker also has a bright future. It's leading the movement toward the convergence of electronic and mechanical security products, which has myriad benefits. Wireless-enabled technology allows building owners to monitor and control access areas remotely. Consequently, they can reduce shrinkage, improve security, grant and deny access daily, and improve workflow productivity by knowing which workers are in which areas at all times.
The added value is significant, and given that only about 30% of sales are from electronic products and the adoption rate of electronic locks is only 10% in North America, there's ample growth potential.
Still, investors are concerned with the company's exposure to the North American residential market in 2024, and it doesn't help that overall sales in the first quarter were down 3.6% organically year over year.
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However, both issues are likely to prove temporary. The North American housing market will improve in a lower interest rate environment. In addition, the revenue decline in the first quarter is largely down to a tough comparison with the first quarter of 2023, when organic sales increased by 15% on an organic basis. On a two-year comparison, sales increased by 5.3% on a compound annual growth rate basis.
As such, the dip in the share price looks to be an excellent buying opportunity in a long-term growth story.
