Hexcel

Hexcel reported second-quarter revenue of $529 million, up 8% compared with the year-ago quarter, with adjusted operating profit of $73.6 million, up 36% from the year-ago quarter. Aerospace production rates are finally ramping up, and Hexcel is benefiting from operating leverage as they do.

Why it matters: Lulls in demand for composites in Boeing and Airbus widebody jets, due to other bottlenecks in increasing production of those planes, accounted for most of the financial drag on Hexcel in 2025, but both aircraft makers are now ramping up production in earnest, and Hexcel is seeing increased shipment orders. We are witnessing a rebound in deliveries unlocking genuine operating leverage for Hexcel as it puts to use the capacity it invested in years ago.

The bottom line: We've raised our fair value estimate for narrow-moat Hexcel to $90 per share from $81, reflecting the time value of money and a higher margin forecast especially in the Engineered Products segment.

Bulls say: Hexcel's shares have traded above our fair value estimate for some time, reflecting investors' enthusiasm for the margin expansion story as production rates climb. We give full credence to the benefits of operating leverage for Hexcel's bottom line, as reflected in our forecast and fair value estimate.

Our fair value estimate is $90 per share, representing 38.5 times our 2026 estimated earnings and implies an enterprise value that is 18 times our forecast for 2026 EBITDA. The primary valuation drivers are aircraft production rates, margins on production, and the (relatively low) amount of capital reinvestment required.

We expect revenue growth to average 8.9% over the next five years, led by global increases in large aircraft production. In defense, we expect Hexcel's exposure to the F-35 and other military aircraft production to grow at a low-single-digit rate. Longer-term, we anticipate steadier revenue increases with normalizing aircraft production and an eventual recovery in the wide-body market, including Hexcel's lucrative exposure to the Airbus A350 program. We project that the company's military exposure will grow roughly in line with overall budgets, somewhat slowed by steadier production for small and shrinking exposure to adjacent markets like high-performance automobiles.

We project meaningful operating margin expansion for Hexcel from pandemic-depressed levels. Margin went from nonexistent in 2020 to 12% in 2023 before dipping below 10% in in 2024 and 2025, though we forecast a steady contribution from incremental margin as the firm can ramp up output volume in its primary and intermittently underutilized commercial aerospace facilities. We see adjusted operating margin lapping 2019's 18% by 2027, and our midcycle operating margin is 22%.

The company was able to pare capital expenditures to maintenance levels during the pandemic and will grow into existing capacity in the next year or two; Hexcel delivered just under 1,800 commercial shipsets in 2019, and we anticipate a similar delivery pace sometime in the later part of 2026. We expect some incremental investment as both Boeing and Airbus are ramping up their total delivery rates for narrow-bodies from historical levels, but we estimate capital spending will normalize around 6% of sales only after 2029. We use a 7.9% cost of capital to discount cash flows.

We think Hexcel, a manufacturer of aerospace-grade composite fibers, resins, and structural materials, deserves a narrow moat based on switching costs and intangible assets. Hexcel's customers face switching costs because there are very few alternatives to its products, Hexcel is often the sole supplier of mission-critical components on aircraft or other platforms with long and complex production runs, and customers are very risk-averse and thus unwilling to switch suppliers lightly. The fact that aircraft designs are regulated for airworthiness also forms an intangible asset that limits entry into its markets.

The company reports its segments as composite materials and engineered products, with approximately 80% of the business in composite materials. Its customers are further segmented by end market, around 60% in commercial aerospace and 40% in defense and space. We think the proper way to understand the company's competitive position is by end-market exposure, where at least 87% of its revenue comes from commercial aerospace and defense and space applications, which we see as the moatiest exposures for commodity processors, each with a comparable split between composite materials and engineered products. We do not believe the small industrial business has a moat, and the segment had negligible engineered products revenue.

Referring to the moat framework for commodity processors, we believe Hexcel acts as a downstream processor with specialized products and a high degree of customer intimacy as it supplies inputs to major and critical components of high-value and long-lived platforms like the fuselage and wings that constitute nearly half the weight of the latest generation wide-body aircraft, the Airbus A350 and Boeing B787. The concentration of Hexcel's customers in the aerospace and defense market confers its economic moat but also limits that moat to a narrow one. We see Hexcel as inheriting some of the moat of its top two customers—its products form crucial elements of their aircrafts' design and manufacture, and even though the composites represent a growing physical portion of the airframes, their relatively small monetary value as a proportion of the value of the assembled plane is static or decreasing, indicating to us that Hexcel does not control its economic destiny in the long run. That said, we see little threat of new entrants within the next 10 years or so, as neither Boeing nor Airbus is working on a clean-sheet new design that would launch in that time and might spur a new bidder, not to mention that Hexcel is a strong incumbent in those development conversations. Hexcel will also have built out its capacity to meet projected demand for current models, so we see little incremental room for moat-accretive investment in aerospace and defense composites (for Hexcel or other providers), even as the technology of carbon fiber and related composites will continue to evolve. Indeed, the carbon fiber market for aerospace and defense applications remains dominated by a handful of the original firms that developed and designed carbon fiber for industrial use.

We see the primary switching cost for Hexcel’s aerospace customers as their lack of viable alternatives. Although several manufacturers produce carbon fiber composites, few provide them to the aerospace and defense market, and when they do, they are most often procured on a sole-source basis and are not easily interchangeable due to the certification process required for commercial aerospace products and their specialization for a given aircraft design. While Hexcel does not disclose the exact amount of revenue from sole-source contracts, it has noted that most of its revenue is on a sole-source basis. Since these contracts also last for the often decadeslong stretches of an aircraft’s production life, this gives Hexcel years of revenue visibility, with outright recompetition unlikely for a given aircraft design.

Boeing and Airbus, Hexcel's biggest customers, are quite conservative because carbon fiber components are central to the core product they deliver. Carbon fiber is inherent to many aerostructures, such as wings and fuselages, so product failure due to carbon fiber failure would be catastrophic to the manufacturer’s reputation; thus, we think the mission-criticality of carbon fiber to the end product is a strong disincentive to switch suppliers. With each generation of new aircraft, composites as a percentage of weight have increased because they allow airlines to save on fuel expense. We do not anticipate this secular trend to slow, as fuel-saving improvements drive the adoption of newer aircraft.

We think Hexcel benefits from a regulatory intangible asset as well for much of its aerospace revenue. Any commercial aircraft design must go through a years-long and multimillion-dollar certification process to be approved for service. While the certification process is not an insurmountable barrier in and of itself, redesigning the aircraft around an alternative supplier would require engineers to reconsider how the part interacts with others and may require recertification of the aircraft as a whole. A major part of Hexcel’s business is manufacturing carbon fiber for aircraft wings. On a new aircraft design, the wings are the most important feature because they drive the bulk of the vehicle's aerodynamic performance and other characteristics. Thus, Hexcel is embedded in mission-critical parts of its customers' processes, and switching suppliers would be very disruptive once the proprietary wing design has been implemented with Hexcel's inputs and engineering. Additionally, aircraft manufacturers tend to be more focused on generating efficiencies of scale rather than compressing the margins of their critical suppliers. Frequently, aircraft manufacturers will only certify one supplier for a mission-critical product, and that sole-source supplier maintains the business for the entirety of the production run. As long as Hexcel satisfies its performance obligations, manufacturers have no reason to go through the arduous process of certifying an additional supplier, ensuring that the updated product remains safe. The value of Hexcel’s contribution to a given airplane is quite small relative to the price of the aircraft, which suggests to us that aircraft manufacturers would not reap substantial benefits from trimming small percentages of their suppliers’ margins. We think this regulatory intangible asset serves to complement the company’s switching costs stemming from a lack of viable alternatives and significant time and risk involved in a supplier switch.

Within Hexcel's defense exposure, we see similar dynamics to commercial aerospace, though carbon fiber has not penetrated the defense market as deeply to date as it has in commercial aerospace. The firm has revenue exposure to the F-35, which we expect will be the primary fighter aircraft for the US military and its allies for the next several decades, as well as numerous rotor blades and replacement parts for military aircraft and rotorcraft. Typically, the competitive dynamics for the military business resemble the commercial model, with sole-source contracts prevailing. While defense platforms are not explicitly regulated the way commercial aircraft are, the design specifications are set by the customer and enforced through certification to the specified design in the original delivery and maintenance of the platform. Hexcel is the only aerospace-grade carbon fiber manufacturer that is based in the United States, which we believe may put it at an advantage relative to peers in the US military market for carbon fiber components.

We do not believe the company’s small exposure to industrial products has a moat. Historically, this segment’s largest industrial application was wind turbine manufacturing, but it also included the outdoor recreation market in skis, bicycles, boats, and the like. These markets do not have the advantages that aerospace products have because they do not bear the same switching costs, rigorous durability requirements, or customer intimacy. Most importantly, the carbon fiber input is less heavily engineered and more prone to competitive sourcing. Wind turbines have become a commoditized product with substantial deflationary price pressure, as wind turbine contracts are sold at auctions with numerous industry participants. To continue winning contracts, the turbine-makers will initiate steep cost-reduction goals for their supply chain and will outsource suppliers that cannot meet the targets. We think the customers' demonstrated ability to outsource Hexcel’s content is indicative of a lack of switching costs in this market. We do not see any material competitive advantages in the outdoor recreation market, as there is a decentralized customer base with several potential carbon fiber suppliers.

Commercial aerospace manufacturing has a highly visible revenue runway from increasing flights per capita as middle-class demand in emerging markets grows.

Hexcel has long-term sole-source contracts for most of its revenue, which we believe creates substantial switching costs for customers.

Composites, Hexcel’s primary product, have increased as a proportion of aircraft weight with each successive generation of aircraft.

More than half of 2019 commercial revenue came from wide-body production, which fell 60% by 2021, and we do not expect it to return to 2019 levels until 2029.

Hexcel pared back capital spending during the pandemic but will eventually have to reinvest in expanding capacity to ramp up narrow-body parts production.

The company is subject to the whims and tribulations of its biggest customers, Boeing and Airbus, which have each experienced disruptive swings in the production rates of their airplanes.