Hexcel Corporation Reports Solid 3Q; Shares Soar 13%

One of our top buys, Hexcel Corp. (HXL), reported 3Q earnings on October 23, which beat the Street's expectation and sent the shares nearly 13% higher. HXL's 3Q EPS came in at $0.18, two cents better than the Street's consensus and two cents better than last year, on strong commercial aerospace revenues and margin expansion.

Commercial aerospace sales (50% of total business) were up 16% on account of Boeing (BA) production and despite continued weakness at Airbus (Airbus sales down 5% year-over-year). Anecdotally, it appears that Airbus has turned the corner with the much anticipated recent delivery of the A380 to Singapore Airlines. The plane is scheduled to make its first flight, Singapore to Sydney , in two days. Singapore Airlines, Emirates Airlines, British Airways, and Virgin are all in line to purchase A380s.

Wind power sales were also strong in 3Q, as wind is becoming an increasingly popular energy alternative - this trend is expected to continue. HXL's profit margin benefited from the high-margin commercial aerospace sales as well as strong corporate cost control. On the cost control front, management has done a good job cutting costs subsequent to the sale of its electronics & ballistics and architectural businesses.

Going forward, we expect HXL to benefit from the upswing in the commercial aerospace cycle and associated recent carbon fiber capacity additions. We believe the current cycle will last at least through 2011. The current demand continues to be driven by international airlines in developing economies. Nevertheless, the legacy U.S. carriers are expected to return to the market over the next several years. Moreover, there is much more carbon fiber employed on next generation aircraft such as the Boeing 787 and Airbus A350 / A380.

Overall, we view the market trends and HXL's competitive position very favorably. Some argue that the Company's valuation is somewhat rich at around 13x next year's EBITDA. However, we expect the Company to outperform next year's earnings estimates on heady commercial aero growth. In addition, we do not believe the Street is factoring in the considerable pricing power that the Company could realize as commercial aero demand ramps up and carbon fiber supply is constrained. Finally, we would expect the Company's multiple to expand as investors may be willing to pay more for growth in 2008 given the potential for a slowing economy.

Disclosure: none

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[leo smith]

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[leo smith]

for any financial queries click on the following url:

https://secure.holotec...