Should You Buy Hexcel At $48?

We believe that Hexcel stock (NYSE: HXL), an industrial materials company that manufactures structural materials for use in aerospace, defense, and industrial markets, is a good buying opportunity at the present time. HXL stock trades near $48 currently and it is, in fact, down 40% from its pre-Covid high of around $80 in January 2020 – before the coronavirus pandemic hit the world. HXL stock has had a volatile ride the past few months. It rallied from levels of under $30 in March 2020, when broader markets made the bottom, to levels north of $56 in December 2020. Over the recent weeks, the stock has trended downward to levels of $48 currently. The 60% rally since its March 2020 lows compares with 70% growth for the broader S&P500 Index over the same period. The slight underperformance can partly be attributed to lower than estimated quarterly performance in Q2 and Q3. The commercial aerospace sector has suffered significant losses coupled with a decline in space & defense spending owing to the pandemic. Now that vaccines have been approved in multiple countries, air travel is likely to resume aiding Hexcel’s sales going forward, and this should bode well for the stock in the near term. In this note we focus on a comparative analysis of Hexcel stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

Timeline of 2020 Coronavirus Crisis:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 70% from the lows seen on Mar 23 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how HXL stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

MORE FOR YOU

HXL and S&P 500 Performance Over 2007-08 Financial Crisis

HXL stock declined from levels of about $23 in October 2007 (pre-crisis peak) to levels of $6 in March 2009 (as the markets bottomed out), implying HXL stock lost 73%. It staged a strong recovery post the 2008 crisis, rallying 109% to levels of $13 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in October 2007 and to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

Hexcel’s Fundamentals Have Been Robust Over The Recent Years

Hexcel revenues saw a rise of 26% from $1.9 billion in 2015 to $2.4 billion in 2019, mainly driven by growth in the composite material segment. Similarly, the company’s net income increased from $237.2 million to $306.6 million, resulting in an EPS growth from $2.48 in 2015 to $3.61 in 2019. However, the company’s Q3 2020 revenues were 50% below the year-ago period, which resulted in a decline in the EPS figure from $0.94 to $0.12. The drop in the recent quarter was due to the impact of the Covid-19 pandemic on the aerospace and defense sector.

Does Hexcel Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Hexcel’s total debt increased from $0.7 billion in 2016 to $1 billion at the end of Q3 2020, while its total cash increased from $35 million to around $68 million over the same period. The company generated around $157 million in cash from its operations in the first nine months of 2020. The company’s limited cash and higher debt could be a cause of concern if the situation were to worsen further, making it difficult to weather the crisis. That said, with the vaccines approval, it appears that the worst of the pandemic is behind us.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development aided stock indices growth.
  • Early 2021: Multiple countries approved the vaccines for Covid-19, further buoying market sentiment.

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of total revenues in 2021, boding well for HXL stock in the near term. We believe that HXL stock could rally back to its pre-Covid levels of over $70, implying over 45% upside from the current levels.

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