From Under-Appreciated Stock To Leading Aerospace Player By 2025: Analyst Elevates Hexcel's Outlook

RBC Capital Markets analyst Ken Herbert upgraded Hexcel Corp HXL to Outperform from Sector Perform at an increased price target of $85 from $75.

Although the analyst expects aerospace growth to be in just mid-single-digits in H2, he expects an acceleration in 2024-2025. 

The analyst believes the company is a high-quality aerospace stock with an under-appreciated FCF upside and sees HXL as well positioned to deliver better-than-expected margins and FCF upside on the expected increase in production rates for commercial aircraft. 

Herbert estimates 2025 FCF to be $320 million, ahead of consensus. The analyst assumes around $250 million in incremental buybacks through 2025, with an additional capacity of about $300 million.

The analyst expects operating margins to hit 17% in 2025 (assuming 30% incremental margins in 2024-2025) with sales of $2.3 billion. 

Herbert believes several 2022 and H1 FY23 margin headwinds related to labor, energy, materials, and logistics to become meaningful tailwinds in 2024.

Consequently, the analyst raised the adjusted EPS estimate to $2.62 from $2.50 for FY24 and $3.45 from $3.18 for FY25.

Also, he increased the adjusted EBITDA estimate to $449.1 million (from $437.0 million) for FY24 and $525.9 million (from $499.6 million) for FY25.

Last month, HXL reported Q2 2023 adjusted EPS of $0.50, beating the consensus of $0.48, and sales of $454.30 million beat the consensus of $448.36 million. 

Price Action: HXL shares are trading higher by 1.00% at $69.80 on the last check Tuesday.