A Soaring Stock Most People Have Never Heard Of
I like pick-and-shovel plays.
Because pick-and-shovel businesses supply essential equipment to companies in an industry rather than making the end product, they don’t usually get that much investor attention, meaning there could still be upside in their stock prices.
And if that industry is growing, pick-and-shovel companies just might turn out to be the biggest winners.
That’s why today I want to talk to you about Hexcel Corporation (NYSE:HXL).
The name likely won’t ring a bell for most people; the company doesn’t sell a product to consumers directly, and HXL stock rarely gets mentioned in the financial media.
And yet, Hexcel is one of the best pick-and-shovel plays in the booming aerospace industry.
Let me explain.
Hexcel Corporation Is a Pick-and-Shovel Play
It’s no secret that there has been a growing demand for commercial aviation. As a result, aircraft manufacturers have received a lot of investor enthusiasm. Notably, Boeing Co’s (NYSE:BA) share price has surged 138% over the past two years while Airbus SE (OTCMKTS:EADSY, EPA:AIR) stock has climbed 75%.
But do you know what Boeing and Airbus have in common (other than that they make airplanes)?
Both companies purchase materials from Hexcel Corporation.
You see, despite not being a household name, Hexcel is a leader in composite materials technology.
Headquartered in Stamford, Connecticut, the company produces carbon fiber, specialty reinforcements, adhesives, and other materials used in commercial aerospace, defense, and industrial applications.
This is an industry with high barriers to entry and few competitors. Think about it: if you want to buy materials that you will use to build something that carries hundreds of passengers 30,000 feet in the air, you would probably buy it from an established manufacturer.
As it turns out, Hexcel is one of the most reputable names in the business. The company supplied aluminum honeycombs that were used in the energy-absorbing footpads of the lunar landing module of “Apollo 11″—the first spaceflight that put man on the moon.
Today, the business is still firing on all cylinders thanks to the booming commercial aviation industry.
According to its latest earnings report, Hexcel generated record sales of $561.0 million in the fourth quarter of 2018, marking a 10% increase year-over-year. Commercial aerospace sales accounted for 68.7% of the company’s total top line for the quarter. (Source: “Hexcel Reports 2018 Fourth Quarter and Full Year Results,” Hexcel Corporation, January 23, 2019.)
Bottom-line results were equally impressive; the company’s adjusted earnings came in at $0.82 per diluted share for the quarter. That represented a 17% increase from the year-ago period.
In full-year 2018, Hexcel’s net sales grew 10.9% while its adjusted earnings per share (EPS) surged 13.8%.
Keep in mind that the company was founded back in 1948. It’s not every day that you see a seven-decade-old business churning out double-digit growth rates in both revenue and profits.
Hexcel Corporation Adjusted Diluted EPS Growth
The chart below shows Hexcel’s bottom-line performance in each of the last six years.
(Source: “Investor Briefing January 2019,” Hexcel Corporation, last accessed February 15, 2019.)
Of course, past performance does not guarantee future results. However, Hexcel Corporation is well positioned to keep delivering solid financials. The reason is simple: the booming demand for commercial aviation has led to sizable backlogs at aircraft manufacturers.
According to Hexcel’s latest investor presentation, its Airbus and Boeing order backlog is worth approximately $10.0 billion. This could give a significant boost to the company down the road. (Source: Ibid.)
Looking ahead, management expects Hexcel Corporation to generate total sales of about $2.4–$2.5 billion in full-year 2019. That would be another sizable increase from the $2.2 billion earned last year. (Source: “Hexcel Reports 2018 Fourth Quarter and Full Year Results,” op cit.)
HXL Stock Chart
Chart courtesy of StockCharts.com
For most of 2018, Hexcel stock was trading sideways. The market sell-off toward the end of the year brought the stock down to the low $50s, but in recent weeks, it has been making a strong comeback.
Year-to-date, HXL stock has already climbed by 24%.
With a strong competitive advantage, rock-solid financials, and secular tailwinds, Hexcel is a pick-and-shovel play that growth investors should not ignore.