HWM - Howmet Aerospace Stock Surges: Can It Go Higher?

2023-11-06 11:35:47 ET

Summary

• Howmet Aerospace stock surged almost 8% after beating analyst estimates and increasing guidance.
• The company saw revenue growth in all segments, driven by higher build rates and gaining share in titanium processing.
• Howmet Aerospace has been diligent in retiring debt early, enhancing its cash flow and balance sheet.

Following the release of third quarter results, Howmet Aerospace (HWM) stock surged almost 8%. And looking and given that the company beat analyst estimates, increased guidance, accelerated debt retirement and previously increased its dividend, there might be good reasons for investors to push the stock higher. In this report, I will be analyzing third quarter results, updated guidance and rate Howmet Aerospace stock along with a price target.

What Does Howmet Aerospace Do?

It might be possible that you have not heard of Howmet Aerospace before. However, chances are high you have heard of Alcoa ( AA ). Howmet Aerospace used to be part of Alcoa. In November 2016, Alcoa Inc. spun off its bauxite and aluminum operations to a newly-formed company called Alcoa Corp. Alcoa Inc. which focused on precision casting, aerospace and industrial applications, was subsequently renamed Arconic Inc. and in 2019 Arconic itself was split in Arconic Corp. and Howmet Aerospace.

The description below provides an overview of the products and structure of Howmet Aerospace:

Howmet Aerospace Inc. is a global provider of advanced engineered solutions for the aerospace and transportation industries. The Company’s operations consist of four segments: Engine Products, Fastening Systems, Engineered Structures and Forged Wheels. The Engine Products segment produces investment castings, including airfoils, and rolled rings primarily for aircraft engines and industrial gas turbines. The Fastening Systems segment produces aerospace fastening systems, as well as commercial transportation, industrial and other fasteners. The Engineered Structures segment produces titanium ingots and mill products for aerospace and defense applications and is vertically integrated to produce titanium forgings, extrusions forming and machining services for airframe, wing, aero-engine, and landing gear components. The Forged Wheels segment provides forged aluminum wheels and related products for heavy-duty trucks, trailers, and buses globally.

How Did Howmet Aerospace Perform In The Third Quarter?

During the third quarter, Howmet Aerospace saw its revenues increase 16% year-over-year with growth in all segments. Aerospace commercial revenues were up 23% driven by higher build rates and gaining share in titanium processing while aerospace defense sales grew 13% driven by higher F-35 and legacy program sales for a total 20% growth in aerospace revenues. Commercial transportation showed 7% revenue growth and Industrial sales grew 10% driven by higher oil and gas end market sales. Sequentially, sales grew 1% driven by seasonality so the flat sequential sales are not to be projected forward.

The segments at Howmet Aerospace are not divided by end-market, so we can’t determine how the margins were per end market, but Engine Product sales grew 17% to $798 million and achieved an 27.4% EBITDA margin up 20 bps from a year ago. Fastening Systems revenues grew 20% on EBITDA margin of 21.8% down 20 bps for an EBITDA of $76 million. Engineering Structures sales saw revenues grow by 18% to $227 million but its EBITDA of $30 million only showed 7% growth driven by higher headcount adding to the costs and decline in aerospace defense sales. Forged Wheels saw revenues increase by 7% to $285 million with 20% growth in EBITDA to $77 million on 13% higher volume.

Putting it all together sales grew 16%, EBITDA grew 18.3% with margins expanding from 22.5% to 23%. The growth drivers going forward are the higher build rates that OEMs are targeting as well as gaining share in titanium processing as suppliers are filling up the supply capacity that previously was filled by Russian suppliers. In 2019, Howmet Aerospace commercial sales were 60% of all sales and right now they still stand only at 49% so there is a lot of upside to the revenues in that particular segment, even more so given the ability to expand market share in the titanium processing markets and the fact that in 2019 build rates for the Boeing 737 MAX were brought down and those rates should be increasing with annual increases expected.

Howmet Aerospace Enhances Cash Flow and Balance Sheet By Retiring Debt Early

What I like about Howmet Aerospace is not just the strong growth they're seeing but also their diligent approach toward debt retirement. The company has paid down $176 million in Q1 and $200 million in Q3 which translates to $19 million lower interest expenses adding to earlier interest savings of $9 million on $169 million in debt retirements. The improving capital structure also has attracted upgrades from rating agencies, which should reduce cost of debt in case the company needs to issue new debt.

Currently, the company has $705 million due in 2024 with cash and cash equivalents of $425 million. Given its unchanged free cash flow guide and its year-to-date cash performance, Q4 should yield around $356 million in free cash flow which already covers 50% of the debt due in 2024. With its current cash position and cash inflow in Q4, the company is positioned well to service the debt for 2024 as there will be cash generation in 2024 as well.

Howmet Aerospace Guides Up For 2023, Provides Preliminary Guidance For 2024

For 2023, Howmet Aerospace increased its baseline estimate for revenues by $105 million to $6.545 billion which should add $40 million to adjusted EBITDA and $0.07 in earnings per share. The guidance update is not huge, but we see that the third quarter performance did unlock additional upside to the results this year. For 2024, the company expects 7% growth in revenues.

Does Howmet Aerospace Pay An Attractive Dividend?

In September, Howmet Aerospace announced a 25% increase to its dividend bringing its quarterly dividend to $0.05 and its forward yield to 0.4%. So, that's not an extremely attractive dividend and the dividend per share growth rate also does not provide a strong base for a highly compelling investment for dividends. So, I view the dividends as nice to have but not something for income investors.

Is Howmet Aerospace Stock A Good Buy?

Howmet Aerospace does not provide a compelling dividend yield or a growth rate that makes it attractive measured against its stock price. The fundamentals and forward projections on earnings, however, provide a significantly more compelling investment opportunity. Against its median EV/EBITDA, the stock is somewhat overvalued. However, I believe that Howmet Aerospace deserves to trade in line with the targeted EV/EBITDA of 16x, which indicates the stock is slightly undervalued at current prices for 2023 earnings and 17% upside to $56.50 exists which is higher than the average price target of $55.05 that Wall Street analysts have. The rating, which is calculated based on a scoring that weighs industry performance and other element such as risk and ability to outperform the market, provides a buy rating for the stock.

Conclusion: Howmet Aerospace Stock Provides A Compelling Investment Opportunity

Howmet Aerospace is seeing significant growth in its end markets and there's significant upside as defense budgets are expanding, and more importantly, OEMs are increasing production while the company is capturing more of the titanium market as sanctions have forced Russian aerospace suppliers out of that market. As a result, and based on the scoring of the stock screener, I'm marking the stock a buy with the dividend being a small but nice bonus.

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