- Aerospace and Defense sectors are currently expensive but you can find some stocks for your long term portfolio.
- Howmet Aerospace is the one stock in A&D that I bought recently and here is why I like it.
- Diversification is good if you know what you're doing, and if you're not sure, then put your money in ETFs and Mutual Funds.
- A quick glance at Howmet shows that the stock is expensive but there's value when buying for long term.
Aerospace and Defense sectors are currently expensive but you can find some stocks for your long term portfolio. Aerospace and Defense (A&D) sector includes companies that make aircrafts and related parts including accessories, and parts used during the national defense. There are many moving parts in A&D industry and definitely there are many companies to choose from when considering investing by buying stocks in this sector. A&D sector stocks are on average expensive, however, being selective in any sector is important because you want to buy a stock you are going to hold for many years to come. My favorite stocks in this sector are Boeing (BA), Howmet (HWM) and Raytheon (RTX), but in this blog I'm concerned with HWM since it's my new holding and I like it.
Howmet Aerospace is one of the stocks in A&D that I bought recently and here is why I like it. The Pittsburgh, PA base Arconic Inc. officially split into tw companies; Arconic Corp and Howmet Aerospace. Howmet Aerospace is listed on the New York Stock Exchange under the ticker:(HWM), while Arconic Corp is listed under the ticker: (ARNC). After the separation, $HWM includes the engineered products and forgings segment, while Arconic Corp. consists of the rolled products unit. Both companies remain headquartered in Pittsburgh, PA (Source: The Pittsburgh Post-Gazette).
A quick glance at Howmet shows that the stock is expensive but there's value when buying for long term. Like the Oracle of Omaha said-If you cannot hold a stock for ten years, don't even think about holding it for one day: Warren Buffett. Although HWM is trading at 52 week high, I generally find this stock interesting for my long term holding. I bought this stock about 2 months ago, after getting tired of hearing too much noise about Boeing (BA), another A&D stock that I have held since it fell under $160, and RTX. $HWM is doing well in terms of revenue but it missed earnings consensus estimates in terms of EPS. Q1 2021 earnings (GAAP) EPS shows EPS of $0.18, missing by a hair, $0.01, while beating on non-GAAP EPS of $0.03. In terms of revenue, $HWM earned $1.2billion, missing by $50 million. Additionally, revenues were down by -62% YoY, while operating income came in at $189million, missing consensus estimates of $192.9 Million. What attracted me to this company is the forward guidance for fiscal year 2021, CEO sounded positive when CEO stated that the company's full year FCF increased to $450 million. The company does not pay any dividends currently, which is fine with me since that money can be used to fuel growth via R&D or for stock buy backs which would increase shareholders value.
Diversification is good if you know what you're doing, and if you're not sure, then put your money in ETFs and Mutual Funds. I'm holding this stock because I like where the company is going. Looking at HWM fundamentals, the company has a debt to capital ratio of 56.28%, compared to 65.95%, A&D industry average (MRQ). HWM has Quick Ratio (MRQ) at 1.12x industry at 1.36x, meaning the sector is a bit well prepared for challenges ahead. More so, the company has interest coverage at2.68x v 6.50x industrywide. As long as interest coverage is above 1, I'm okay with that, even though HWM appears behind the industry in terms of interest coverage. For PE ratio, the GAAP (TTM) stands at 119x, v 284.53 industrywide. Definitely HWM appears fairly valued to overvalued but PE should be considered together with other metrics. The PEG is at 3.48x higher than industry average of 2.81x, but the book value at 4.10x v 4.90x together with the FCF of nearly a half a billion or $450 million to be exact, and given that HWM is more profitable than defense and aerospace industry, is what makes me want to still own HWM given that the stock is a growth stock and I'm fairly young. In terms of profit margin, HWM beats industry by a large gap, given that the company's gross profit margin is 26.20% v 15.80% YoY. Additionally, YoY, HWM spots net profit margin at 2.85% v industry average at a negative 0.64%, which makes me to believe that HWM is in a good position to grow further!
Final thought: Aerospace and Defense stocks have been bid up at this time, so, it's not easy to find undervalued/cheap stocks in this field, at least not in U.S.A :) maybe $BA since it has not yet struck its all time highs of $444. While I believe that $HWM is still a buy for the long term portfolio holders, in my opinion, it's good to note that the company is not near perfect, since it has failed to meet consensus EPS targets by 0ver 25% of the time. However, this EPS failings cannot scare me since the Howmet is FCF positive and it does not pay dividends. When I buy a stock for growth and dividends, I look for an EPS greater than what the company pays in dividends by at least 40%. With this, I get sense that the company is not borrowing in order to pay dividends.
Analyst's Disclosure: I am/we are long RTX, HWM.
This is a personal blog, please note that I'm not endorsing any tickers mentioned in my blog. Please do your own research on any or all of the stocks mentioned in this blog before you buy. Please this is not an advice for anyone to ACT ON!
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