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According to RBC Capital, HXL stock has lost some 8% since reporting itsThe analyst believes HXL is a high-quality aerospace stock with underappreciated upside potential to its free cash flow . RBC Capital's confidence in 2024-2025 rate increases is improving. HXL stock is back to about 80% of its pre-pandemic peak and is on pace to surpass its prior peak margins in 2025. RBC Capital currently models ~18% aerospace growth in 2024 and 2025, respectively.
The analyst believes the aero supply chain is stabilizing, but that it continues to present risk to the pace of production increases. RBC Capital has incremental confidence in the higher margins and FCF performance on its conservative build rate assumptions. It estimates operating margins will hit 17% in 2025 on $2.3B in sales . And it believes many of the 2022 and 1H23 margin headwinds should become meaningful tailwinds in 2024.
With leverage at 2x, investor focus is shifting to capital allocation, which RBC Capital believes will be a positive catalyst. Its 2025 FCF estimate is $320 million , ahead of consensus. While it expects management to remain opportunistic with mergers and acquisitions , even assuming ~$250M in incremental buybacks through 2025, RBC's model supports an additional ~$300M in capacity, assuming just 1.5x leverage.
The lack of clear-sheet aircraft programs should enable HXL to spend under $100M in capex through 2025. Note capex averaged $260M in 2015-2019. RBC Capital’s $85 price target is based on a 22x multiple applied to its 2025 FCF estimate. In 2017-2019 HXL traded at an average FCF multiple of 25x.
Shares rose meaningfully in the premarket, but slid during the regular session to $69, fractionally lower than Monday's closing price.
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