Howmet Aerospace Inc.: Diverse With Solid Performance And Growth Potential (NYSE:HWM)

Investment Thesis

Howmet Aerospace Inc. (NYSE:HWM) shares have been growing steadily in the past, gaining about 337.80% over the last five years and outpacing the S&P 500 by a margin of about 258%.

Despite this outstanding performance, I am bullish on this stock given its diverse portfolio, strong financial performance, and competitive advantage. I believe that given these major strong points of the company, it is in a strong position to leverage the growing markets.

Diverse Portfolio

Howmet has a wide range of products that appeal to a wide market and customers. Its diverse product portfolio is divided into four major segments. The first one is the engine products, which accounted for about 49.2% of its total revenue in 2023. In the segment, the company produces jet engine components such as turbine blades and airfoils, which are used in engines of military aircraft. In addition, it produces thermal barrier coatings as well as other surface treatments to improve the performance and durability of the engine.

The other segment is the fastening systems where the company produces fasteners such as bolts, screws, and nuts. These fasteners are used to join structural parts of aircraft, rockets, and automobiles. This, being the second-largest segment, accounted for about 20.3% of the company’s 2023 total revenue.

The third one is the engineered structures which produce complex structural components like wing skins, fuselages among other products. In addition, this segment produces advanced composite materials used to enhance the strength and weight of its engineered products. In 2023, it accounted for 13.2% of total revenue.

Lastly is the forged wheels section, which produces forged aluminum wheels used for commercial transportation and automotive industries. Further, it offers wheel accessories such as hub covers and lug nuts.

With its diversity, the company has managed to capitalize on different market segments and delivered impressive financial results with each segment registering solid growth in the 2023 FY. Indeed, it’s only one segment that didn’t register a double-digit growth.

In my opinion, the company’s revenue mix is a reflection of its ability to leverage its core competencies and get the best out of different end markets. I believe this diversity will be a major long-term growth catalyst because besides appealing to a wide range of customer needs, well-performing segments can cushion poorly performing segments, resulting in a positive net effect on revenues and margins.

Financial Performance

While financial health is one of my primary focuses before making any investment decision, I am attracted by HWM’s financial status. To begin with, the company has been improving its performance since 2020 to date. It has grown its revenue from $5.26 billion in 2020 to $6.64 billion in 2023 while its operating and net incomes have grown from $809 million and $259 million respectively in 2020 to, $1.20 billion and $765 million respectively in 2023.

Further to support that this company is producing a robust financial performance, in its MRQ it reported an EPS of $053 beating estimates by $0.07 and revenue came in at $1.73 billion, marking a YoY growth of 14.41% and beating estimates by $78.87 million. Further, in the 2023 FY, the company demonstrated its ability to generate impressive cash flows, which in my view, is very critical to its solvency. To give the numbers, the company registered a record FCF of $682 million and a FCF conversion rate of 89% which is quite impressive. In my opinion, this strong performance reflects the strong demand for the company’s products and the benefits of its diversity.

Following the impressive results, the company is currently a top dog in the growth and profitability race when compared to the sector medians, making this an attractive choice for profit and growth-oriented investors.

Its growth figures a significantly above the industry medians.

The company’s profit margins are significantly above the sector median, reflecting its ability to control cost relative to its revenues as well as its ability to use assets efficiently to realize profits and create value for shareholders.

While this past performance is very pleasing, it can only make sense if the future is promising. With this in mind, I am optimistic about the company’s future performance, especially given the strong projected market growth in the aerospace and transportation industry. According to precedence research, the global aerospace market is projected to grow by a CAGR of 7.80% between 2023 and 2032 while the global transportation industry is projected to grow by a CAGR of 8.11%. Given this expected growth, I expect the company to exploit it with its diverse portfolio and hence keep its financial performance growing.

To support my promising outlook is the company’s upward revisions both in revenues and EPS, as shown below.

In a nutshell, the future is bright, and therefore I expect this company to keep delivering impressive financial performance in the coming FYs.

Competitive Advantage

Howmet’s competitive advantage stems from its innovation, diversity, and loyal customer base. Its products are designed to offer lighter, more efficient, and lower emission solutions. This ensures that their products comply with the emerging trends of a safer environment, and hence their relevance to modern consumer demands.

The company has a track record of being innovative with nearly 1,150 granted and pending patents, which I believe acts as its MOAT. It invests in research and development to develop new products to meet evolving consumer needs. With these vast patents, I believe the company enjoys and will continue offering unique products that make them stand out in the market and hence beat the competition.

Another important aspect that forms its competitive advantage is its loyal customer base, especially its ties with the world’s leading aerospace and transportation companies such as Boeing and Airbus. The company has long-term contracts with its customers, which offer visibility and stability to its revenue streams. Further, it has a vast global footprint with about 58 manufacturing and service locations in about 20 countries, which helps them to serve its customers efficiently and effectively. This, in my view, results in improved customer satisfaction and loyalty.

Given this background, this company has a marginal competitive edge, which I believe positions it strategically for long-term growth.

Valuation

To value this company, I will consider the PEG ratio because it factors in a company’s growth capabilities. HWM has a trailing PEG ratio of 0.53 which is below the sector median of 0.84. Further, it has a forward PEG ratio of 1.62 which is also lower than the sector median of 1.79. Given this background, it appears that this stock is undervalued based on its growth potential, and this, in my view, offers a good entry point for growth-oriented investors to enter this promising company at a discount. Given the company’s bright outlook, competitive advantage, and diversity, I believe this company will keep experiencing strong growth in the future, and therefore it is not too late to board.

Further, to justify a buy decision, I will draw your attention to the consensus analyst price target. According to 14 Wall Street analysts, they have an average price target of $67.43 marking an upside potential of 6.85% in the next 12 months accompanied by a strong buy recommendation.

In addition, the market’s optimism about this company’s future growth potential is reflected by its forward PE of 28.34 which is above the sector median of 21.90, and a forward PS ratio of 3.61 which is above the sector median of 1.46. In my opinion, these multiples signify that the market has very high expectations of the company’s future earnings and sales, an indication that this stock has a strong growth potential.

Risks

Just like any other investment, investing here has its share of risks. One of the major risks of investing in this company is a contractual breakdown. As earlier mentioned, Howmet has entered into long-term contracts with some of its major customers. These contracts are binding and some are subject to renegotiation, and renewal. As a result, in case a customer withdraws or any of these contracts fails, it could adversely affect its financial health, which could in turn hurt its share prices. Further, the company operates in multiple states with different legal structures; therefore, it faces a regulatory risk in case it fails to comply with government contracting regulations.

Conclusion

In conclusion, HWM is an attractive company with a diverse portfolio, a strong financial performance backed by a bright outlook, and a competitive advantage. In my view, these solid parameters form a solid basis to support my bullish outlook of this stock and as a result, I rate it a buy given its growth potential.