Financial Results
In general, the first quarter of 2013 went well for Hexcel Corporation (NYSE:HXL). The company earned 43 cents per share, which resulted in 10.1% higher income. The Fool listed an average earnings estimate of 41 cents per share, so this was an earnings beat. Hexcel also posted 4.1% overall sales growth for the quarter. This manufacturer reports separate results for each of its three main markets, and two of these markets turned in double digit growth. Hexcel’s commercial aerospace sales rose 11%, and its defense and space sales rose 13.1%.
Wind power didn’t do as well this quarter, although the company faced a tough comparison with 2012 here. Hexcel’s industrial operations reported 29.2% lower sales because of weaker demand for wind turbines. Commercial aerospace makes up Hexcel’s largest market, but the wind power business does impact the company’s results. The industrial market provided 18% of Hexcel Corporation (NYSE:HXL)’s sales in 2012. This market shrank to 12% of total sales in the first quarter of 2013 as the manufacturer reported $51.6 million in industrial sales out of its $416.5 million total.
Composites
Hexcel Corporation (NYSE:HXL) benefits from the trend toward composite use in the airplane manufacturing industry. As the company’s 2012 annual report explains, airplane makers once primarily used metal to manufacture their planes. Newer airplane models can contain high percentages of composites. Hexcel pointed out that composites make up more than half of the weight of both the Boeing 787 Dreamliner and the Airbus A350.
These materials allow airplane makers to greatly reduce the weight of their planes and make different structural designs possible. With Hexcel’s help, airplanes can include more space for passengers and use less fuel. Higher composite ratios in planes also mean higher sales for Hexcel. A Hexcel press release explains that a plane that contains over 50% composite materials can provide $4 million in revenue for the company.
The Dreamliner
Hexcel’s sales could take off as its materials find uses in other products, but the company does depend on these innovative products working correctly. Lithium ion batteries also helped reduce the Dreamliner’s weight. Batteries in two planes overheated back in January, and the Dreamliners were taken out of service. Now The Boeing Company (NYSE:BA) has announced that it’s fixed the battery problems and the Dreamliners will soon return.
The BBC reported that the battery problem has cost The Boeing Company (NYSE:BA) about $600 million. This expense comes out to around 15% of The Boeing Company (NYSE:BA)’s $3.9 billion annual income. At The Boeing Company (NYSE:BA)’s PEG ratio of 0.97, bad short term results because of battery related expenses could create a buying opportunity. Airlines could still replace their old fleets with Dreamliners in the future. Boeing looks like it has a long term winner with this airplane, which means a steady source of sales for Hexcel as well.
The Competition
Zoltek Companies, Inc. (NASDAQ:ZOLT) found customers in the wind power industry, but this carbon fiber maker doesn’t want to be seen as a wind power pure play. Zoltek Companies, Inc. (NASDAQ:ZOLT)’s 2012 annual report provides a reminder that carbon fiber composites have many uses, and the company specifically brings up the composite based Boeing 787 Dreamliner and Airbus A350 as examples. The carbon fiber maker also explains that its current sales figures mostly reflect results from its wind turbine business, but it also has research under way in other areas.
Right now, Hexcel looks cheaper than Zoltek. Hexcel Corporation (NYSE:HXL) has a forward P/E of 14 and a PEG ratio of 1.29, while Zoltek has a forward P/E of 19 and a PEG ratio of 1.86. Zoltek Companies, Inc. (NASDAQ:ZOLT) currently trades for a premium because of buyout interest from Quinpario Partners. Bloomberg’s Jack Kaskey reported that Quinpario offered a price in the mid-teens for Zoltek shares, and the investor group’s also looking at other chemical and materials companies, including mid-caps. Hexcel has a market cap of $2.87 billion.
Takeaway
Composite airplane parts provide the main reason to buy Hexcel right now. Now that Boeing’s fixed the Dreamliner problems, these planes can demonstrate their fuel efficiency to the airlines once again. The Airbus A350 will also help showcase Hexcel’s technology. Hexcel currently depends heavily on the airline industry, which is a risk, but wind power and defense sales provide some diversification and the company’s technology could show up in other industries in the future. Hexcel Corporation (NYSE:HXL)’s one of the relatively rare stocks that carries a five star CAPS rating, and its products can help its customers improve their margins, which could drive sales. This materials company looks like a decent investment.
The article Lighter Airplanes Are No Dream originally appeared on Fool.com and is written by Eric Novinson.
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