Howmet Aerospace (HWM)

After spinning out Arconic in April 2020, HWM is a more focussed, higher margin business, and we believe this ‘quality’ is not fully appreciated by the market

• We see a cyclical recovery and improving margins across all its businesses

Aerospace growth capex has been spent, leaving the industry with improving returns and strong free cash-flow generation over the next 3-5 years as volume recovers.

• HWM trades at ~5% 2023 FCF yield, 13x 2022 EV/EBITDA and ~24x PE on 2022 street estimates, yet it will grow earnings ~30% annually from 2021-23.

• High incremental margins: Aggressive cost cutting appears structural in nature.

• Incremental margins for next couple of years of ~35% on incremental volume vs. current 20%.

• Strong cyclical recovery in commercial planes deliveries in 2022 and 2023 and Trucks benefiting from easing supply chain issues in H2 2022 and 2023.

• Capital allocation to buybacks and M&A could also help earnings.

Potential Upside: $46 (+31%)

Sensible Downside: $30 (-14%)

Link to Research