With aerospace giants like RTX and General Electric already reporting and giving estimates for another year of solid growth in the original equipment manufacturer (OEM) and aftermarket, it's time to turn to some aerospace-related stocks the market may be dismissing too quickly. In this context, I think Delta Air Lines(NYSE: DAL) and lesser-known aerospace suppliers Hexcel(NYSE: HXL) and Carpenter Technology(NYSE: CRS) are worth picking up for investors looking for aerospace exposure.
1. Delta Air Lines stock looks like a great value
The main reason why aerospace suppliers expect a strong year is because the air travel recovery is continuing, which means more airline profits, leading to more aircraft deliveries and airplane servicing. It makes sense to look at an airline like Delta Air Lines.
The stock was hit in January after its fourth-quarter 2024 earnings were released. In summary, the market took a dim view of management lowering its earnings and free cash flow (FCF) guidance for 2024. Instead of earnings per share above $7, management now expects $6 to $7 (Wall Street analysts have a consensus of $6.48). Instead of FCF above $4 billion, management now expects $3 billion to $4 billion (Wall Street has $3.39 billion).
The big delta in Delta's (forgive the atrocious pun) expectations comes from the expected increase in non-fuel cost per available seat mile (CASM-Ex), which management expects to rise 3% in the first quarter and "low single-digit" for the full year. Meanwhile, in a sign that growth is slowing, Delta lowered its capacity expansion plans for 2024 to 3% to 5% from "mid-single digits" previously.
Image source: Getty Images.
Slowing growth and rising costs spell margin compression, and it's no surprise the market sold the stock. However, valuations still matter, and Delta is still growing earnings and cash flow. While Delta ended 2023 with $21.4 billion in net debt, remember that FCF comes after interest payments are met, so a price-to-FCF multiple of less than 8 times FCF makes it look like a good value. Granted, if the economy does take a turndown, then so will air travel, and earnings estimates for Delta will be revised downwards. Still, until that happens, the stock remains attractive on a risk/reward basis.
2. Hexcel's growth is just getting started
Investors in advanced composites company Hexcel will have to be patient. As CEO Nick Stanage noted on the recent earnings call "limited build rates in a number of programs from increasing as fast as we expected when 2023 began." In addition, the company has been ramping up investment in reopening lines and hiring and training labor in anticipation of future growth in airplane build rates.
Unfortunately, a combination of the two (lower-than-expected airplane build rates and spending increases) means Hexcel is suffering near-term margin compression -- adjusted operating income margin declined to 10.7% in the fourth quarter of 2023 compared to 10.8% in the same quarter of 2022.
But here's the thing. There's still a multiyear backlog of airplanes to be delivered, and manufacturers like Boeing, Airbus, and Dassault are doing everything they can to increase production, so it's more of a timing issue. Thinking longer-term, not only is Hexcel a beneficiary of increased airplane production, but it also benefits from newer models being developed as there's a tendency for each more recent generation of airplanes to contain more of the advanced composites that Hexcel offers.
Image source: Getty Images.
3. Carpenter Technology's medium-term growth prospects
The $3.2 billion market cap company produces and distributes specialty alloys and performance-engineered products. Aerospace and defense make up its crucial end market, representing roughly 50% of 2023 sales, and its next-biggest end market is industrial and consumer, with 18.3%.
As the chart below demonstrates, the company was hit hard by the pandemic, and it's only now that its trailing-12-month income has surpassed that of 2019. Still, just as with Hexcel, there's little doubt its aerospace & defense customers are doing everything they can to ramp production.
CRS Operating Margin (TTM) data by YCharts
The company plans to double its 2019 operating income of $243 million by 2027, with ongoing strength in aerospace (management expects its second half of 2024 aerospace and defense sales to be 25% higher than its first half), backed by solid demand in medical applications, energy demand, and a possible recovery in the semiconductor market.
Trading on 16.4 times estimated 2024 earnings (Carpenter's financial year finishes at the end of June) and 13.5 times 2025 estimates, the stock looks like an excellent value for aerospace & defense investors.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines, Hexcel, and RTX. The Motley Fool has a disclosure policy.
