Hexcel: Boeing And Airbus Backlogs Prop Up Profits

| About: Hexcel Corporation (HXL)

In July, the Paris Air Show will provide a lot of market making news for commercial airline manufacturers Airbus (OTCPK:EADSY) and Boeing (NYSE:BA). The orders generated at this show may also offer catalysts for airline suppliers, including Hexcel Corp (NYSE:HXL).

Hexcel is a maker of lightweight composite materials heavily incorporated into fuel-efficient next-generation planes.

The company's carbon fiber materials are just one of the reasons commercial airline operators including United Continental (NYSE:UAL) and the soon to be combined American Airlines (AAMRQ.PK) and US Airways (LCC) are embracing Boeing and Airbus's newest models.

In addition to the commercial airline business, Hexcel also sells rotorcraft products for helicopters such as the V22 Osprey, and wind turbine blades to the energy industry.

However, neither of those businesses offer the opportunity of commercial aerospace.

Wind has struggled following the expiration of tax credits and helicopter program sales are notoriously choppy from one quarter to the next.

Instead, commercial aerospace offers far more stable and predictable growth, supported by massive order backlogs at both Airbus and Boeing, both of whom account for the lion's share of Hexcel's revenue.

The newest planes from those manufacturers contain as much as 10 times the composite material as prior generations, which mean demand for Hexcel's products will move hand in glove with Boeing and Airbus production growth.

The demand for Boeing's and Airbus's newest programs helped Hexcel's revenue increase 10% last quarter, despite headwinds in its much smaller wind segment.

Thanks to higher production at Boeing and Airbus, Hexcel's commercial aerospace sales increased 11% last quarter. And, sales into Boeing and Airbus's newest programs were up more than 20% -- growing to 30% of segment revenue.

Importantly, more of those sales dollars flowed through to the bottom line as 15% full-year sales growth generated 26% growth in earnings per share in 2012 thanks to operating margins increasing 1.6% from 2011.

Sales into the Boeing and Airbus legacy programs weren't shabby either. Sales for programs like the Boeing 737 were up 10%.

Given the Airbus and Boeing backlogs are 4948 and 4450 planes, up from 4400 and 4000, respectively roughly a year ago, the tailwinds for Hexcel revenue and profit growth are likely to remain strong for years.

Those backlogs are increasingly driving both Boeing and Airbus to increase production.

Early next year, Boeing expects 737 productions to reach 42 planes per month, up from 38 currently. The number of 777s rolling off Boeing's lines has increased to 8.3 per month from 7 and production of the troubled 787 is expected to reach 10 per month, up from 5, by year end. Over at Airbus, production of the A330 climbed to 10 per month in Q1.

As we move closer to mid July's Paris Air show, commercial aerospace plays such as Hexcel should see additional attention from sell-side analysts and buy-side managers.

The show, which is held every odd year at Le Bourget Airport in north Paris, typically yields big orders from global airlines.

At the 2011 show, Airbus notched about 910 orders worth $88 billion and Boeing collected 141 orders worth $22 billion. Another good year for orders will further increase the pressure on Boeing and Airbus to ramp assembly lines.

Its likely airs show orders are the main reason Hexcel's shares have produced historically strong returns in the second quarter.

According to the Seasonal Investor database, Hexcel shares have climbed in 9 of the past 10 Q2's, producing a median 8.25% return. If this year follows along with history, now may be a good time for Hexcel shareholders.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HXL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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