The Rising Influence of Rising Affluence

[DewDiligence]

Barron’s Likes Hexcel

[HXL is an indirect aerospace play, flying in the coattails of Boeing and EADS as those companies build more and more planes to satisfy The Global Demographic Tailwind (#msg-62155190). Although rather expensive in terms of its 2011 P/E of 20x, HXL’s enterprise value of about $2B gives it considerable buyout vig, IMO. Does anyone here follow this name?]

http://online.barrons.com/article/SB50001424053111904210704576357543980572176.html

›Enjoying a Strong Tail Wind

SATURDAY, JUNE 4, 2011
By NEIL A. MARTIN

Before Neil Armstrong even stepped on the moon on July 20, 1969, executives and engineers at composite-materials maker Hexcel had breathed a big sigh of relief. The San Francisco company made the footpads for the Apollo lunar-landing module, so its arrival had provided the most anxiety. No one was "absolutely sure what kind of surface the craft would be settling down on—hard, soft, sandy or soluble," confides an insider. There was "obviously great relief when everything proved stable."

"We like to say that Hexcel was the first to the moon," jokes CEO David E. Berges.

Founded in 1946 by a couple of Berkeley-educated engineers working out of their basements, Hexcel (ticker: HXL) has evolved from its modest start on through the early space age to become the country's leading provider of carbon fibers, reinforcements and honeycombed composite materials. (Honeycomb refers to a unique structure similar to a beehive.) It's probably best known for the light, innovative skis it made under its own brand in the 1970s. Although it gave up selling Hexcel-branded skis, the company's composites today show up in a wide array of products ranging from commercial aircraft and helicopters to wind-turbine fans and from satellites and spacecraft components to bicycles and snow boards.

After revenue growth averaging about 4.2% in the five years through 2010, Hexcel's ascension rate has begun to rise. Despite their recent, well-publicized stumbles, big clients like Boeing and EADS, which account for more than half of Hexcel's roughly $1.2 billion in sales, are expected to lift spending as their new jumbo planes gradually take hold. At the same time, surging demand from established and emerging-markets countries for new planes should bolster sales of the light, flexible, ultra-strong materials that Hexcel is known for. The company also has healthy growth prospects supplying advanced materials that go into "green" energy suppliers like wind turbines.

"Current build rates and new programs could result in solid double-digit [revenue] growth for years to come in commercial aerospace markets large and small," says Berges.

Berges, 61, and Hexcel have already provided investors with some good news. Near the end of April, when we met with him at what's now the company's Stamford, Conn., headquarters, Berges had just announced a 67% jump in first-quarter profit and higher sales across its aerospace, defense, industrial and wind-energy markets. He'd also lifted Hexcel's full-year earnings target. The stock reflects much of this improvement, rising to 20 last week from 14.89 a year ago.

But bulls believe Hexcel has further to go. Deutsche Bank aerospace analyst Amit Mehrotra in Boston rates Hexcel a Buy with a 12-month, $27 price target, which would be 25.7 times his 2011 earnings-per-share estimate of $1.05, rising to $1.33 in 2012. The company projects 95 cents to $1.05 a share for this year on sales of $1.275 billion to $1.35 billion, up from 78 cents a share on sales of $1.17 billion in 2010. Hexcel, says Mehrotra, is "poised for significant growth" as a result of the aviation industry's continuing shift to composites to replace metals and rising production rates around the world. About 55% of its sales come from abroad, with Europe [i.e. EADS] kicking in 41%; the U.S. accounts for the 45% remainder.

Hexcel is in a sweet spot not just because airplane orders are going up. Its materials are also gaining favor. They're light and durable, saving on energy and replacement costs. Mehrotra predicts that 44% of large aircraft produced in 2017, in dollar terms, will be "high Hexcel content," versus 14% in 2011. "The new programs like the Boeing 787, the Airbus A380 and Airbus A350 have between 25% and 50% composite content by weight, compared with zero-to-15% for older models," he says. That "should support 15%-20% annual sales growth [and 25% to 30% earnings growth] in Hexcel's commercial aerospace businesses through at least 2014."

Also pushing growth: Hexcel is a leading supplier of blades for wind-turbine engines.

There is caution about the stock on Wall Street, given its recent rise. Michael Sison, with KeyBanc Capital Markets in Cleveland, cites the lack of "meaningful" near-term catalysts like big new orders to drive margins—and the stock—higher. "While we believe there is potential for multiple expansion," he writes in a recent report, "near-term uncertainty for demand in global wind markets, as well as the status of defense spending and noise surrounding the 787 delivery and production schedules, prevents us from becoming positive at this time."

Shareholder Nick Galluccio, who runs Teton Advisors and the Gamco Westwood Small Cap Equity Fund, is a longer-term bull: "Hexcel will benefit over the next five years from the aging of the world's commercial aircraft fleet and the need to replace those planes with more modern, fuel-efficient aircraft. The Hexcel story has legs," he says.

Even more promising: The world's air fleet is aging fastest outside the U.S. "If you look at Boeing's or Airbus' backlogs, you'll see that maybe less than 25% represents U.S. carriers," says Berges. "It is a small portion compared with times in the past. In fact, since the 2001 difficulties, the vast majority of the orders have been the Mideast and Europe, Brazil, China. Our growth has not been U.S.-driven." Given the state of the U.S. space program, that's a good thing.‹