Raytheon Technologies (NYSE:RTX) has established itself as a solid investment, offering a balanced portfolio in both the commercial aerospace and defense sectors. The stock has experienced significant growth, appreciating by 47.5%, largely due to the company effectively managing challenges, particularly the manufacturing issues related to the geared turbofan (GTF) engines produced by its Pratt & Whitney division for the Airbus A320neo aircraft. Substantial progress has been made in inspecting, and replacing parts on these engines where necessary. However, this positive momentum appears to be largely reflected in the current stock price, suggesting that much of the potential good news is already priced in. Considering this, investors might want to explore alternative opportunities with greater upside potential, such as advanced materials company Hexcel (HXL). This analysis will delve into a Nyse:rtx Compare scenario, examining RTX’s current valuation and comparing it to the potential of Hexcel, to provide a clearer investment perspective.
RTX Stock: A Fair Valuation Perspective
RTX’s strong performance this year is undeniably linked to its commercial aerospace division. The GTF engine inspections are proceeding as anticipated, and the company’s aftermarket sales in the commercial aerospace sector have surpassed expectations, mirroring the broader positive trends in the aerospace industry. Despite these successes, RTX has revised its full-year free-cash-flow (FCF) guidance downwards. This adjustment is primarily attributed to legal issues within its defense business and charges associated with the termination of a fixed-price development defense program.
These challenges highlight a broader trend of margin pressures faced by many defense contractors, especially concerning fixed-price contracts. Industry giants like Boeing and Lockheed Martin have also encountered similar difficulties, indicating a systemic issue rather than company-specific problems. Therefore, while RTX remains a robust player, its current stock valuation may reflect its full potential, prompting a consideration of alternative investments.
Hexcel: An Undervalued Opportunity in Aerospace Composites
In contrast to RTX’s upward trajectory, Hexcel (HXL) has faced headwinds this year. Hexcel specializes in advanced carbon fiber composites, primarily utilized by original equipment manufacturers in the aerospace sector, with minimal aftermarket sales. This means Hexcel’s performance is closely tied to new aircraft production rates. Notably, in 2023, approximately 39% of Hexcel’s sales were attributed to Airbus and its subcontractors, while Boeing and its subcontractors accounted for 15%.
Unfortunately, both Airbus and Boeing have revised their delivery forecasts for the current year downwards, directly impacting Hexcel’s stock, which has decreased by almost 19% in 2024. Hexcel initially projected revenues between $1.925 billion and $2.025 billion for the year. However, following their second-quarter results in July, this guidance was lowered to a range of $1.9 billion to $1.98 billion. The midpoint of earnings per share guidance was also adjusted downwards from $2.20 to $2.10. Furthermore, the ongoing strike at Boeing adds to the negative sentiment surrounding Hexcel.
Hexcel’s Potential for Outperformance
While Hexcel faces immediate challenges and investor uncertainty, its long-term prospects remain exceptionally promising, driven by two key factors.
Firstly, despite reduced delivery expectations for 2024, both Boeing and Airbus maintain substantial multi-year backlogs. They are highly motivated to increase production and delivery rates. This drive to ramp up production suggests that the revenue Hexcel is currently missing out on is more likely deferred rather than permanently lost. Hexcel is positioned to recapture these sales in the future as production bottlenecks ease.
Hexcel’s management estimates that the current backlogs of Airbus and Boeing represent over $9 billion in future sales for the company—exceeding four years of sales at the current annual rate. Moreover, Boeing’s long-term commercial market forecast anticipates a demand for approximately 44,000 new airplanes globally over the next two decades. This robust long-term demand underpins Hexcel’s future revenue potential.
Secondly, Hexcel is strategically positioned to benefit from both increased aircraft production and the growing proportion of composite materials used in aircraft manufacturing. This trend towards greater composite usage is driven by the superior strength and lighter weight of composites compared to traditional aluminum, enhancing fuel efficiency and aiding airlines in meeting carbon emission reduction targets.
The increasing production of wide-body aircraft that heavily utilize composites, such as the new Boeing 777X, Boeing 787, and Airbus A350, will significantly boost Hexcel’s sales. Similarly, narrow-body aircraft like the Airbus A320neo family and Boeing 737 MAX incorporate significantly more Hexcel content than their older counterparts, further driving demand for Hexcel’s products.
Investment Conclusion: Hexcel Offers Compelling Upside
While RTX is a fundamentally sound stock and a worthy component of a diversified investment portfolio, its current valuation appears to reflect its fair market value. Concerns regarding margin pressures in the defense sector add a layer of caution. Conversely, Hexcel presents a compelling case for long-term growth. For investors who can withstand potential near-term market fluctuations, particularly those influenced by ongoing events like the Boeing strike, Hexcel represents an attractive investment opportunity. Buying Hexcel stock during periods of weakness could be a strategic move to capitalize on its significant long-term growth potential in the expanding aerospace market.
