Yahoo Finance Hexcel (NYSE:HXL) Posts Better-Than-Expected Sales In Q2
Aerospace and defense company Hexcel (NYSE:HXL) reported Q2 CY2024 results beating Wall Street analysts' expectations , with revenue up 10.1% year on year to $500.4 million. On the other hand, the company's full-year revenue guidance of $1.94 billion at the midpoint came in slightly below analysts' estimates. It made a non-GAAP profit of $0.60 per share, improving from its profit of $0.50 per share in the same quarter last year.
Is now the time to buy Hexcel? Find out in our full research report.
Hexcel (HXL) Q2 CY2024 Highlights:
Revenue: $500.4 million vs analyst estimates of $486 million (3% beat)
EPS (non-GAAP): $0.60 vs analyst estimates of $0.56 (6.5% beat)
The company dropped its revenue guidance for the full year from $1.98 billion to $1.94 billion at the midpoint, a 1.8% decrease
Gross Margin (GAAP): 25.3%, up from 24.4% in the same quarter last year
Free Cash Flow of $21.3 million is up from -$35.7 million in the previous quarter
Market Capitalization: $5.65 billion
CEO and President Tom Gentile said, “Our Hexcel team delivered a solid financial performance in the second quarter with strong overall revenue growth that drove continued recovery in margins. We are well-positioned and ready to support our customers’ rate increases and remain excited about the medium-term outlook and opportunity. In the near term, aircraft delivery levels and public comments by our customers on production plans warrant a more cautious stance, which we are reflecting in our revised 2024 guidance. We remain strongly positioned for growth with available plant capacity, and we continue employee training and operational optimization for the production ramp ahead. Reflecting our continued confidence in Hexcel’s future, we repurchased another $100 million of Hexcel common stock during the second quarter, bringing the total 2024 share repurchases to $200 million.”
Founded shortly after World War II by a group of engineers from UC Berkley, Hexcel (NYSE:HXL) manufactures lightweight composite materials primarily for the aerospace and defense sectors.
Aerospace
Aerospace companies often possess technical expertise and have made significant capital investments to produce complex products. It is an industry where innovation is important, and lately, emissions and automation are in focus, so companies that boast advances in these areas can take market share. On the other hand, demand for aerospace products can ebb and flow with economic cycles and geopolitical tensions, which can be particularly painful for companies with high fixed costs.
Sales Growth
A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Hexcel struggled to generate demand over the last five years as its sales dropped by 4.4% annually, a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Hexcel's annualized revenue growth of 11.9% over the last two years is above its five-year trend, suggesting its demand recently accelerated.
Hexcel also breaks out the revenue for its most important segments, Commercial aerospace and Space & defense, which are 64.1% and 27.8% of revenue. Over the last two years, Hexcel's Commercial aerospace revenue (customers like Airbus, Boeing) averaged 18.9% year-on-year growth while its Space & defense revenue (government customers) averaged 12.2% growth.
This quarter, Hexcel reported robust year-on-year revenue growth of 10.1%, and its $500.4 million of revenue exceeded Wall Street's estimates by 3%. Looking ahead, Wall Street expects sales to grow 12.2% over the next 12 months, an acceleration from this quarter.
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Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Hexcel has done a decent job managing its expenses over the last five years. The company has produced an average operating margin of 9.5%, higher than the broader industrials sector.
Analyzing the trend in its profitability, Hexcel's annual operating margin decreased by 1.9 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Hexcel become more profitable in the coming years.
In Q2, Hexcel generated an operating profit margin of 14.3%, in line with the same quarter last year. This indicates the company's overall cost structure has been relatively stable.
EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Sadly for Hexcel, its EPS declined more than its revenue over the last five years, dropping by 11.5% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Diving into the nuances of Hexcel's earnings can give us a better understanding of its performance. As we mentioned earlier, Hexcel's operating margin was flat this quarter but declined by 1.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Hexcel, its two-year annual EPS growth of 48.4% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q2, Hexcel reported EPS at $0.60, up from $0.50 in the same quarter last year. This print beat analysts' estimates by 6.5%. Over the next 12 months, Wall Street expects Hexcel to grow its earnings. Analysts are projecting its EPS of $1.85 in the last year to climb by 35.8% to $2.51.
Key Takeaways from Hexcel's Q2 Results
We were impressed by how significantly Hexcel blew past analysts' revenue expectations this quarter. We were also glad its EPS outperformed Wall Street's estimates. On the other hand, its full-year EPS forecast was underwhelming and its full-year revenue guidance was lowered to slightly below Wall Street's estimates. Zooming out, we think the quarter was fine, but the guidance is weighing on shares. The stock traded down 4.3% to $65 immediately following the results.
So should you invest in Hexcel right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
