Hexcel is an attractive, high ROIC business with limited competition and strong underlying organic growth trends.
Near term, it is all about margin expansion and incremental margins rebounding. We expect incremental margins of 2019 onwards to surprise the market after a disappointing 2018, which had a number of headwinds.
We like the secular increasing penetration of composite materials in Aerospace. The latest planes A350 and B787 have shown the way with 50% composite content. High volume planes are still at ~10% composite content. We believe there is plenty of room for increasing content growth, but it does not happen linearly.
We expect HXL to grow at 7-9%pa organically for the foreseeable future as content in aerospace continues to growCyclical aspect of growth looks ok for now, although our ability to notice / our record in discounting cyclical turning points is poor.
Potential Upside: $90 (+25%): DCF based, 2020 revenue assumption 5.7% above consensus.
Sensible Downside: $62 (-13%): Barring a recession, downside looks limited to us.
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