Hexcel Corporation (NYSE:HXL) is a maker of carbon fiber and other products which are used to manufacture aircraft as well as other applications. This company recently appointed a new CEO, and the stock plunged on this news. I wanted to take a closer look to see if the big drop was a potential buying opportunity. This company has a fairly unique role in supplying carbon fiber composites and numerous patents. It is also benefiting from the demand for aircraft, as is shown below:
Hexcel.com
Hexcel.com
The Chart
As the chart below shows, Hexcel shares were trading for about $77 just recently, but just plunged to around the $62 level, right after the company appointed a new CEO. The stock is oversold now and could be poised for a short-term technical rebound from this recent selloff, but I still don’t view this stock as an attractive buying opportunity for a number of reasons. The 50-day moving average is $72.04 and the 200-day moving average is $70. With the stock now trading around $62, and with the 50-day moving average now below the 200-day moving average, a bearish “Death Cross” could be poised to emerge on the chart. This is often a sign of a serious, possibly prolonged downtrend.
Hexcel.com
The CEO News And Downgrades
Hexcel recently announced that it appointed Tom Gentile to be President and CEO of the company. Mr. Gentile was the former CEO of Spirit AeroSystems (SPR), and as many investors in this sector know, Spirit AeroSystems experienced some serious quality control issues, when he was in charge. Because of this, it seems that many investors were caught off guard, and had concerns about quality control issues under this CEO. The stock plunged after this announcement was made, and analysts at Bank of America (BAC) were quick to downgrade the stock to underperform. Bank of America called this CEO change a “surprise shakeup”, but was very polite and diplomatic with its downgrade, and it stated:
“We note the surprising nature of this announcement as the company did not communicate to the market that it had been pursuing new leadership,” Ronald Epstein, analyst at BofA, said in an April 10 report. “As such, we think it could be poorly received by the market.”
On February 22, 2024, (prior to the new CEO announcement) analysts at Morgan Stanley (MS) also downgraded Hexcel shares based on valuation and because the company could continue to face ongoing supply-chain issues.
Recent Issues At Boeing Could Impact Hexcel
It started to look like the skies were clearing up for Boeing, but in January 2024, an incident occurred (a door plug was blown out during a flight), that called safety concerns back into question with Boeing aircraft. Since the January incident, there have been more incidents that have involved problems that could put passengers at risk. Although some of these could have been caused by a lack of proper maintenance, the spotlight remains on Boeing as it seems to have a potential credibility issue with the airlines, the FAA, and maybe even the flying public. I detailed some of these safety incidents in this article on Boeing, in which I stated I thought the stock could go lower because I expected more negative headlines. Sure enough, there have been more negative headlines and the stock has gone lower. On April 9, 2024, Seeking Alpha News Editor Rob Williams wrote this release, which states a whistleblower reported potentially serious safety lapses in the manufacturing of Boeing’s 787 plane. This has sparked additional investigations into Boeing on top of the ones that started earlier this year.
All of this has resulted in a big slowdown of new aircraft production at Boeing. This production slowdown is starting to impact some Boeing suppliers, and it is also impacting some airlines. Spirit AeroSystems recently announced it was limiting hiring and overtime due to reduced production of the Boeing 737 MAX. These production declines at Boeing have also started to impact United Airlines (UAL), which recently announced it would pause on hiring new pilots, since fewer new planes are being delivered. It seems likely that Hexcel could also see some impact from these Boeing production delays, and this could show up in the coming quarterly results.
According to Earningswhispers.com, Hexcel is expected to report Q1, 2024 earnings on April 22, and the consensus estimate is $0.44 per share in earnings, with revenues expected to come in at $476.89 million. An update on guidance for 2024, could be a key factor in this earnings report.
Earnings Estimates And The Balance Sheet
Analysts expect Hexcel to earn $2.24 per share on revenues of $1.98 billion. In 2025, earnings are expected to reach $3 per share, with revenues coming in at $2.23 billion. For 2026, earnings are expected to increase to $3.59 per share, on revenues of $2.42 billion. Based on these estimates, Hexcel shares are trading for nearly 28 times earnings for 2024, and nearly 21 times earnings for 2025. I don’t find this valuation to be a particularly attractive buying opportunity for investors. Especially with potential production delay issues from Boeing, which could put these estimates at risk.
Hexcel has a solid balance sheet with $227 million in cash and around $728.8 million in debt.
Potential Downside Risks
I believe there are a number of potential downside risks for Hexcel. The recent CEO appointment could remain as an overhang on the stock for a number of reasons, including the potential for uncertainty to arise in terms of the transition and what changes the new CEO could implement. The renewed safety concerns at Boeing have slowed production of some aircraft, and that could impact Hexcel as well.
In Summary
Hexcel is clearly an interesting company and a key supplier of carbon fiber composites. However, the valuation does not appear intriguing, even after a plunge in the share price. Based on what I see, the recent analyst downgrade makes sense, and I would rate this stock as a sell. I believe earnings and guidance are at risk of downward revisions, due to what could be prolonged production delays coming from Boeing. I also think that a better buying opportunity might arise as a result, but also remain concerned with uncertainty from the (new CEO) leadership transition.
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