It has been about a month since the last earnings report for Howmet (HWM). Shares have added about 2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Howmet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Howmet Q3 Earnings Meet, Revenues Miss
Howmet Aerospace’s third-quarter 2022 adjusted earnings of 36 cents per share matched the Zacks Consensus Estimate. The bottom line improved 33.3% year over year. On a sequential basis, Howmet’s bottom line increased 2.9% from 35 cents.
Total revenues of $1,433 million missed the Zacks Consensus Estimate of $1,438 million. The top line increased 11.7% from the year-ago quarter. The increase was backed by an improved commercial aerospace market and pricing actions. On a sequential basis, HWM’s revenues increased 2.9%.
Howmet reports revenues under four segments. A brief discussion of the quarterly results is provided below.
Engine Products’ revenues totaled $683 million, representing 47.7% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues increased 14%, driven by strength in the commercial aerospace, oil and gas volume as well as an increase in material cost pass-through.
The Fastening Systems segment generated revenues of $291 million, accounting for 20.3% of net revenues in the reported quarter. Revenues increased 15% year over year, driven by strength in commercial aerospace, partially offset by the decline in Boeing 787 production.
The Engineered Structures segment’s revenues, representing 13.5% of net revenues, decreased 3% year over year to $193 million. The results suffered due to the decline in the defense aerospace market and a decline in Boeing 787 production.
Forged Wheels revenues totaled $266 million, representing 18.6% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues increased 15%, driven by an expanded volume, higher aluminum material and other inflationary cost pass-through, partially offset by an unfavorable forex movement.
In the reported quarter, Howmet’s cost of goods sold increased 13.8% year over year to $1,056 million. It represented 73.7% of the reported quarter’s net sales compared with 72.3% in the year-ago quarter.
Selling, general, administrative and other expenses increased 4.3% year over year to $73 million. The metric represented 5.1% of net sales in the reported quarter compared with 5.5% in the year-ago quarter. Research and development expenses were $7 million in the quarter.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), excluding special items, in the reported quarter were $323 million, while the adjusted EBITDA margin was 22.5%. Operating profits increased 11.2% year over year to $228 million, whereas a margin of 15.9% decreased 10 basis points from the year-ago reported figure.
Net interest expenses in the quarter totaled $57 million, down 9.5% from the year-ago quarter. The adjusted tax rate in the reported quarter was 23.6%.
Balance Sheet and Cash Flow
While exiting the third quarter of 2022, Howmet had cash and cash equivalents of $453 million, decreasing 37.1% from $720 million recorded in the fourth quarter of 2021. Long-term debt (less amount due within one year) was $4,170 million, down 1.3% from $4,227 million reported in the fourth quarter of 2021.
In the first nine months, Howmet generated net cash of $278 million from operating activities compared with $146 million generated in the year-ago period. Capital spending totaled $148 million compared with $138 million a year ago. Free cash flow was $130 million in the period.
Howmet paid out dividends of $27 million in the first nine months compared with $11 million in the year-ago period. Also, it repurchased shares worth $335 million in the first nine months compared with the $225-million buyback made a year ago.
For 2022, Howmet anticipates revenues of $5.60-$5.65 billion compared with $5.64-$5.71 billion predicted earlier. The midpoint is currently pegged at $5.62 billion compared with the $5.68 billion stated earlier. Earnings (excluding special items) are expected to be $1.39-$1.41 per share compared with $1.38-$1.42 per share anticipated earlier. The midpoint is pegged at $1.40 compared with the $1.41 anticipated earlier.
Adjusted EBITDA is expected to be $1.265-$1.276 billion for the year compared with $1.276-$1.299 billion anticipated earlier, with the mid-point of $1.27 billion. The adjusted EBITDA margin is projected at 22.6%. Free cash flow is predicted to be $520-$580 million compared with $625-$675 million predicted earlier, with a midpoint of $560 million.
For the fourth quarter, Howmet anticipates revenues of $1.45-$1.5 billion, with a mid-point of $1.47 billion. Earnings (excluding special items) are expected to be 37-39 cents (the midpoint being 38 cents), while adjusted EBITDA is predicted to be $325-$336 million (the midpoint being $330 million).
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, Howmet has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. It's no surprise Howmet has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
Howmet is part of the Zacks Engineering - R and D Services industry. Over the past month, KBR Inc. (KBR), a stock from the same industry, has gained 2.6%. The company reported its results for the quarter ended September 2022 more than a month ago.
KBR reported revenues of $1.63 billion in the last reported quarter, representing a year-over-year change of -11.8%. EPS of $0.65 for the same period compares with $0.64 a year ago.
For the current quarter, KBR is expected to post earnings of $0.58 per share, indicating a change of -15.9% from the year-ago quarter. The Zacks Consensus Estimate has changed -1.4% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for KBR. Also, the stock has a VGM Score of B.
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