Hexcel (HXL 0.47%), a leading supplier of advanced composite materials, is best described as the "nearly" stock of the aerospace sector. However, its time will surely come, and its long-term growth prospects remain excellent. If you are prepared to be patient, then initiating a position when sentiment is against the stock could be a smart decision for a long-term investor. This stock could make you richer.
Why Hexcel is out of favor
There's very little aftermarket demand for Hexcel's carbon fiber composites, so any reduction in airplane production expectations at its two key customers -- Airbus and Boeing -- hits Hexcel hard. Approximately 40% of 2024 sales were allocated to Airbus and its subcontractors, while Boeing and its subcontractors accounted for 15%.
NYSE: HXL
Key Data Points
Unfortunately, both airline manufacturers suffered production shortfalls last year, and Airbus has already lowered its expectations for 2025, notably for the composite-rich A350 widebody, an airplane with a shipset value of $4.5 million to $5 million.
Unlike many of the other aerospace suppliers, Hexcel can't fall back on aftermarket revenue (which tends to increase with new airplane deliveries) in such market conditions. It gets worse. The company geared up for new airplane deliveries last year, only to be disappointed, and that creates margin challenges in itself.
That's the main reason Wall Street expects Hexcel to grow sales barely this year and for earnings per share to drop from $2.03 in 2024 to $1.87 in 2025.
Image source: Getty Images.
Why Hexcel can recover
That said, no one should buy stocks based on a company's current performance or its performance over the last 12 months, and this is particularly true in a long-cycle industry like aerospace. The reality is that the commercial aerospace supply chain appears to be improving, and the long-term outlook is highly positive for two major reasons.
Aerospace end markets are improving
First, CEO Tom Gentile served notice in the company's quarterly press release that the market is improving, stating, "We are encouraged by the more positive tones and progress conveyed by the commercial airframe and engine OEMs in recent months." He has a point. First, engine manufacturer GE Aerospace reported a 38% increase in LEAP engine deliveries in the second quarter (used on the Airbus A320neo family and the Boeing 737MAX), and is back on track for a 15%-20% increase in 2025.
Second, after a four-week stoppage, RTX CEO Chris Calio said he thought RTX's Pratt & Whitney (manufacturer of the other engine option on the Airbus A320neo family) is "going to make that up in the balance of the year" with a second-half ramp. As for Boeing, Calio noted that "we are seeing stability in the rates at Boeing; they continue to grow with the focus there on the production system."
The GE Aerospace and RTX news is particularly important for Airbus, as a lack of engines has caused delivery setbacks.
Image source: Getty Images.
Long-term growth prospects
Hexcel's potential for growth is encapsulated by comparing its current aircraft production rates with those of its key customers. As the table demonstrates, a significant amount of aircraft production and deliveries is expected to occur, as Airbus and Boeing appear to be behind schedule.
|
Manufacturer |
Aircraft |
Current |
Stated Aim |
|---|---|---|---|
|
Airbus |
A350 |
21 deliveries in the first half, at a rate of just over 3/month |
12/month in 2028 |
|
Airbus |
A320neo |
232 deliveries in the first half, at a rate of nearly 39/month |
75/month in 2027 |
|
Boeing |
787 |
37 deliveries in the first half at a rate of just over 6/month |
10/month in 2026 |
|
Boeing |
737MAX |
42 in June, and plans to apply to the FAA to remove a 38/month production cap |
52/month |
|
Airbus |
A330neo |
12 deliveries in the first half at a rate of 2/month |
4/month in 2024 |
|
Airbus |
A220 |
41 deliveries in the first half, at a rate of nearly 7 a month |
14/month in 2026 |
Data source: Boeing, Airbus delivery data, author's analysis.
A stock to buy?
At some point, aircraft deliveries are expected to ramp up, taking Hexcel's sales and margins with them. Moreover, every generation of new aircraft tends to incorporate more composites, resulting in increased shipset value opportunities for Hexcel.
The positive recent signs over production from both Boeing and the engine manufacturers (which could feed into a brighter production outlook at Airbus), are good news, and Hexcel is an attractive stock for long-term investors. I predict it could make investors big money.
