This article originally appeared on June 25, 2014. It has not been updated or revised.
The ad from Hilary Kramer is circulating again now and has also apparently not been updated or revised. The stock teased by Kramer and discussed below is the same, it’s within 5% of where it was in June — it did get one analyst downgrade after meeting estimates in their late-July earnings release, and they report earnings again in about two weeks. Enjoy!
“How a $5 million technology can save airlines $23.14 billion over the lifetime of a single airplane…
“Airlines stand to make as much as a 459,900% return on investment from buying this technology…”
“And yet, as I’m about to show you, the first wave of profits will NOT be in the airlines….”
Those lines are from Hilary Kramer, who’s trying to sell you her GameChangers newsletter by teasing a particular stock that will help save those airlines so much money.
We’ll jump ahead a bit and tell you that Hilary Kramer is touting carbon fiber as a way that airlines will become more profitable again (though, as you’ve probably seen from the performance of Airline stocks like Delta Airlines, they’re pretty dang profitable already — now that they’ve reduced capacity and consolidated so much that many routes have no effective competition).
And she says that although the airlines will be more profitable, she doesn’t suggest investing in the airlines. Or even in the big airplane makers like Boeing or Airbus… she thinks you should buy the supplier who profits from demand for lighter and more efficient airplanes.
Here’s some more from the pitch:
“The Ailing Airline Industry May Soon be HUGELY Profitable Again Thanks to Advanced Carbon Fiber Composites
“And yet, as I’m about to show you, the first wave of profits will NOT be in the airlines…
“Beyond cutting fuel consumption by 20-25%, carbon fiber also allows engineers to dramatically reshape the body of a plane to increase its aerodynamics, leading to increased fuel savings and virtually endless industry innovation.”
OK, so carbon fiber is a big deal in aerospace. How do we profit? More from Kramer:
“This is the Safest, Smartest, Most Profitable Way To Invest In New Technologies
“See, Boeing and Airbus are BOTH incorporating this company’s advanced carbon fiber into their planes for the foreseeable future.
“They’re then selling these planes to:
“Air France, Asiana, Cathay Pacific, Finnair, Japan Airlines, Singapore Airlines, TAM and United, Emirates, Etihad Qatar… AND MORE.
“We could buy (nearly) any of those companies and enjoy solid long-term gains as they too profit off the lightweight aircraft trend.
“However, in GameChangers I like to drill down to the companies that are at the heart of the growth… responsible for driving the innovation… creating the key parts for revolution to happen… and positioning themselves for the fastest profits.”
Which might be enough for us to identify the company for you — there aren’t that many big industrial carbon fiber suppliers, after all… but let’s get a few more details just to make sure the Thinkolator is fully fueled up and ready to churn…
“Every time a new-generation plane is built, our company cashes in on a multi-million dollar payday.
“A Boeing B777 pays this company nearly $1 million.
“A Boeing 787, $1.5 million.
“When Airbus builds an A380, our pick gets $3 million.
“For an Airbus A350, which is 50% carbon fiber composite, this company gets a cool$5 million each.
“And remember there is a backlog of over 10,000 of these orders.”
OK… so hoo dat? Thinkolator sea that Hilary Kramer is teasing … Hexcel (HXL), which has had some huge ups and downs over the years as carbon fiber excitement waxed and waned, but has performed exceptionally well coming out of the financial crisis.
HXL is now a $4 billion company, with a pretty steady record in recent years of growing both revenue and earnings (growth in the 10-15% range), with a perfectly reasonable valuation based on that growth rate. They’ve been doing share buybacks, and have a good balance sheet with a very manageable amount of debt.
And interestingly, Hilary Kramer says she doesn’t invest in stocks that don’t have a near-term growth catalyst… but according to the fly on the wall Hexcel just got this assessment from Canaccord last month:
“Hexcel lacks catalysts but has significant upside long-term, says Canaccord
“Canaccord remains bullish on Hexcel long-term despite the lack of near-term catalysts. The firm sees limited downside and significant upside as the company continues to execute its plan leading to incremental margins. Shares are Buy rated with a $52 price target.”
A $52 price target is a nice return of 30% from here, with the stock at $40, should that analyst be correct.
There’s not a huge amount of disagreement among analysts — most of them rate it a buy (though there is one sell and one hold), most of them are lining up pretty close to the expectation of about $2.22 in earnings this year and $2.50+ next year, and 15% long-term earnings growth… and for that, sure, it’s just fine to pay 16X forward earnings.
Assuming, of course, that the analysts are right. And that a carbon fiber airplane doesn’t tear apart in the sky one of these days (that seems unlikely, since it’s been in use in military planes and in increasing quantities in commercial jetliners for years).
I look at the replacement of some aluminum and other materials with carbon fiber and carbon composites as a gradual switch, not a revolutionary change in one generation of aircraft. Hexcel has been primarily dependent on the aerospace industry for decades — even in the 1990s they got more than half of their revenue from aerospace, including a variety of composite materials (not just carbon fiber).
And yes, I suppose that as newer planes require larger amounts of carbon fiber, Hexcel should continue to see increasing revenues — they are indeed supplying $5 million worth of materials for each Airbus A350, which is their most important product/customer according to this article.
“‘Hexcel doesn’t only work within the manufacture of primary structures,’ concluded Merlot. ‘We supply our entire range of materials for the A350, which include engineered core, resins, fabrics, glass prepregs, as well as prepregs for lightning strike applications. Hexcel’s composite product content on the Airbus A350 XWB, represents a total value of $5 million per shipset which equates to the largest ever programme for Hexcel.'”
So I guess that particular plane, on which they have many years of sales backlog, is an important driver… but it’s obviously not something about which the analysts who follow the stock are unaware, so I presume that’s part of the growth expectation built into the shares.
I don’t know whether they get increasing economies of scale, or even if they can scale up quickly if demand increases or if it will be a continued gradual ramp-up in supply and revenue. But it’s a good company trading at a reasonable valuation for their expected growth rate, and certainly everyone and his brother expects aerospace to be a fast-growing sector for many years to come.
I don’t know about any skeletons in their closet, but that doesn’t mean they don’t have any… I don’t know the company well and have never owned it. So go forth, researchify, and let us know if Gumshoe Nation thinks Hexcel belongs in our portfolios. You can report back by sharing your thoughts using the friendly little comment box below.