Goldman On Aerospace: Avoid Original Equipment, Own Aftermarket; Hexcel Downgraded

• Hexcel Corporation HXL shares have been volatile since October 5 and have gained 3 percent since then.
• Goldman Sachs’ Noah Poponak downgraded the rating on the company from Buy to Neutral, while raising the price target from $51 to $52.
• Poponak recommended Aerospace suppliers with higher exposure to the aftermarket over OE suppliers.

Hexcel continues to be “a relatively well positioned” Aerospace supplier long term, analyst Noah Poponak said. He added, however, that there appears to be increased risks to Aerospace Original Equipment, and Hexcel’s business is mostly OE based, with little aftermarket.

Since January 6, 2013, Hexcel’s shares have climbed 62 percent, versus a 40 percent gain in the S&P 500. “We would rather own our Buy-rated names in Defense than Hexcel, at this point in the respective cycles,” Poponak wrote.

The analyst enumerated the concern areas as:

1. Goldman Sachs has a Neutral view of Aerospace, and there are growing concerns related to the delivery cycle. Against this backdrop, Aerospace suppliers with higher exposure to the aftermarket would be preferable for investors than OE suppliers. Hexcel’s is largely an OE supplier.
2. There is likely to be an inventory correction on the A350 program, given the fast-paced ramping by suppliers, although deliveries have been slow.
3. Hexcel’s shares are currently trading at a 19 percent P/E premium to the average Aerospace suppliers. With hardly any difference between the GS estimates and consensus, there seems limited upside in shares.

Poponak pointed out the positives as:

1. Hexcel is a “relatively well positioned Aerospace supplier, with good relative growth prospects and strong returns on capital.”
2. Composites could continue to take share from metal on next-generation aircraft, over the very long run.