Hexcel Corporation Stock Has 25% Upside In The Near Term

by Trefis Team
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We believe that Hexcel Corporation stock (NYSE: HXL) has an upside potential of 25% in the near term, as the commercial aerospace industry recovers to the pre-Covid levels. HXL trades at $34 currently and it has lost 55% in value year-to-date. It traded at a pre-Covid high of $75 in February and is 56% below that level now. Also, HXL stock has gained 11% from the lows of $30 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which helped the stock market recover to a large extent. The stock is lagging the broader markets by a large margin (S&P 500 is up about 50%), as the investors are overly cautious about the improvement in demand for structural materials for the aerospace industry. HXL is a leading producer of carbon fiber reinforcements and resin systems and the world leader in honeycomb manufacturing for the commercial aerospace industry. As a result of the Covid-19 pandemic, the commercial aerospace sector has suffered significant losses coupled with a decline in space & defense spending. However, easing of lockdown restrictions in most parts of the world and re-commencement of air travel is likely to benefit demand for Hexcel Corporation’s offerings in the near term. Given the meager rise in HXL stock since late March, we believe that the stock has room for growth in the near term provided there is no sudden uptick in Covid-19 cases leading to further lockdown restrictions. Our conclusion is based on our detailed analysis of Hexcel Corporation’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 48% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how HXL and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of the S&P 500 index
  • 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Hexcel Corporation vs S&P 500 Performance Over 2007-08 Financial Crisis

HXL stock declined from levels of around $23 in October 2007 (the pre-crisis peak) to roughly $6 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 73% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, HXL recovered strongly post the 2008 crisis to about $13 in early 2010 – rising by 109% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

Hexcel Corporation’ Fundamentals in Recent Years Look Strong

Hexcel Corporation revenues saw a rise of 26% from $1.9 billion in 2015 to $2.4 billion in 2019, mainly driven by growth in the composite material segment. Similarly, the company’s net income increased from $237.2 million to $306.6 million, resulting in an EPS growth from $2.48 in 2015 to $3.61 in 2019. However, the company’s Q3 2020 revenues were 50% below the year-ago period, which resulted in a decline in the EPS figure from $0.94 to $0.12. The drop in the recent quarter was due to the impact of the Covid-19 pandemic.

Does Hexcel Corporation Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Hexcel Corporation’s total debt increased from $0.7 billion in 2016 to $1 billion at the end of Q3 2020, while its total cash increased from $35.2 million to around $68 million over the same period. The company generated around $157 million in cash from its operations in the first nine months of 2020, and if the situation further worsens, its large debt burden and strained financial condition can make it difficult for the company to weather the crisis.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $42 (27% upside) once economic conditions begin to show signs of improving. This marks a partial recovery to the $75 level Hexcel Corporation’s stock was at before the coronavirus outbreak gained global momentum.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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