Howmet: Earnings Carry A Secret Message

Summary

• Q4 earnings show recovery in the commercial aero sector. The reason of recovery is not due to aircraft build rates.
• For the next 2-3 years, HWM can expect a new revenue source. This will be enough to offset loss of revenue due to lower build rates.
• HWM will show exponential revenue growth in 2021 with higher growth rate in the tail end of the year.

Howmet Aerospace Inc. (NYSE:HWM) is at the center of the aerospace industries supplying airplane structural parts and fasteners for construction of aircraft bodies to Boeing (BA), Airbus (OTCPK:EADSF) and Lockheed Martin, supplying jet engine turbine blades to engine manufacturers like Pratt & Whitney (RTX), Rolls Royce and GE Aviation (GE). HWM recently released their Q4 earnings report and its financial performance for the quarter was as guided in their Q3 earnings presentation. By analyzing the growth of revenue and profit margins in each segment separately, we can conclude the following:

1. Commercial airlines will create demand for spare parts in expectation of recovery in the domestic aviation sectors. This will be the next wave of revenue for HWM.
2. Airplane manufacturers have a huge inventory of aircraft parts and airplanes ready to deliver. I do not expect demand from airplane manufacturers anytime soon.
3. Transportation sector has completely recovered. HWM has posted higher profit margins as compared to Q4 2019, but this performance is a one-time event.

In the next 5 minutes, I'll take you through the key numbers of Howmet's earnings report, what they say about the airline industry and provide an idea about what might come next.

Recovery in commercial airliners

HWM serves the commercial airline ecosystem comprising of the airline operators, engine manufacturers and airplane manufacturers by supplying parts for their aircraft engine & structural components. In Q4, commercial aero sector saw 14% growth in the engine component and 7% growth in the engineered structures segments but negative growth of 6% in the fasteners segment. The growth in revenue seen in Q4 is not due to the increased in build rate of airplanes, because, if it were so, all three components would have seen an increase. Also, Boeing has informed a reduction of their production rates in their Q4 release as compared to their

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.