Hexcel Corporation Stock Has Around 40% Upside

We believe that Hexcel Corporation stock (NYSE: HXL) has a potential upside of 42% in the next 1-1.5 years, once the commercial aerospace industry recovers to the pre-Covid-19 levels. Hexcel Corporation deals in lightweight, high-performance structural materials like carbon fibers, honeycomb, adhesives, composite structures, etc., for use in commercial aerospace, space & defense, and industrial markets. It traded at a pre-Covid high of $75 in February 2020 and is 29% below that level now. Also, HXL stock has gained 83% from the low of $30 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock has underperformed the broader markets – S&P500 has gained 102% since the March 2020 lows, as investors are concerned about the negative growth in its sales numbers. The company reported net sales of $320.3 million in the second quarter of 2021 and $630.3 million in the first half of the year, which was down 15% and 31% respectively on a year-on-year basis. 

The demand for structural materials for the aerospace industry suffered in 2020 due to the Covid-19 crisis. The same continued in the first half of 2021 also, however some sub-segments like narrow-body under the commercial aerospace market have posted growth in the second quarter. Similarly, industrial revenues were down 10% and 17% y-o-y in Q2 and the first half of 2021, due to a decline in wind energy sales. However, it was partially offset by some growth in automotive and recreation markets. That said, the accelerated rate of Covid-19 vaccination and easing of travel-related restrictions will likely benefit the commercial aerospace industry, leading to higher demand for Hexcel’s products. In view of the growth in HXL stock since late March 2020, we believe that the stock has strong growth potential in the next 1-1.5 years (back to its pre-Covid peak). Our conclusion is based on our detailed analysis of  Hexcel Corporation’s stock during the 2008 recession vs. now 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 102% from the lows seen on Mar 23, 2020, 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
• 12/31/2009: 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 net sales fell 24% from $1.97 billion in 2017 to $1.50 billion in 2020 due to a 36% y-o-y drop in 2020 driven by the Covid-19 crisis. This translates into a 92% drop in the net income figure to $31.7 million over the same period. The net income suffered more due to higher cost of sales as a % of revenues in 2020. HXL reported a EPS of $0.38 in 2020, down from $3.13 in 2017. Similarly, the company’s Q2 2021 revenues were 15% below the year-ago period, however its EPS figure increased from -$0.01 to $0.03 due to some improvement in operating margin. .

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

Hexcel Corporation’s total debt increased from $0.8 billion in 2017 to $0.9 billion at the end of Q2 2021, while its total cash increased from $60.1 million to around $115.3 million over the same period. The company generated around $38.9 million in cash from its operations in the first six months of 2021, and has a Senior unsecured credit facility of $750 million. Altogether, the company appears to be in an adequate condition to manage its liquidity needs.

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
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $76 (42% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $76 level Hexcel Corporation’s stock was at before the coronavirus outbreak gained global momentum.

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