by Travis Johnson, Stock Gumshoe | October 7, 2014 1:01 am
This article originally appeared on June 25, 2014. It has not been updated or revised.
The ad from Hilary Kramer[1] 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!
—-from 6/25/14—–
“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[2] 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[3] Airlines, Singapore[4] 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.
Are you getting our free Daily Update
"reveal" emails? If not,
just click here...“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[5] 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[6].
“‘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.
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When some one writes about a 459,500% return, they have “jumped the shark” and have lost all credibility with me.
There is so much financial info to digest, I just don’t have time for such hyperbole.
To be fair, in the text it was about how the 400,000% was the cost-saving return of using these materials (which is quite likely a cherry-picked exaggeration, too), not her projected return from owning the stock … though yes, copywriters aren’t stupid — clearly that number was designed to catch attention at the top of the ad.
Agreed. It’s not as if airlines have a choice. They have to go carbon fiber until ultra-strong graphene becomes a reality (50 years or so).
BUT…
Hexcel is a slow and steady growth stock without much downside risk and guaranteed decent upside, and they don’t have any equivalent competition. Besides, aerospace is too conservative an industry for mavericks to disrupt. That’s quite enough.
A potential catalyst might be the driverless cars, which if they take off, might spur the use of carbon fibers in commercial auto bodies as there should be fewer wrecks to deal with. As it is now, the automotive use is limited mostly to racing cars, which, of course, are totalled with high frequency.
Automobiles haven’t yet run though composites, which were the first generation of miracle materials in aerospace. Carbon fiber is the NEXT technological step.
This is also a Michael Robinson “Nova-X Report” reco.
Travis,
What do you make of this firm’s analysis of Ligand? See below.
http://www.valuewalk.com/2014/06/lemelson-ligand-pharmaceuticals-lgnd-no-intrinsic-value/
Travis recently covered this for his Irregulars. Jennifer
Jennifer. I am an Irregular. I know Travis “recovered” Ligand a few weeks ago, but I must have missed where he commented on this specific companies analysis. Can you link it for me please? Thanks for your help.
Casey
The last time I wrote about Ligand, following that short analysis, was here: http://www.stockgumshoe.com/2014/06/points-of-consideration-for-ligand/
I’ve been thinking it over and wondering whether Ligand would respond specifically, but they have not — Roth capital, the most active and among the most optimistic analysts, have reiterated their optimism.
The core of that short argument is that Ligand is very dependent on Promacta for revenues and revenue growth, and that the company is very self-promotional regarding it’s business plan and may be too optimistic about the prospects for their other “maybe someday” royalty producing assets. They essentially argue that Promacta will disappear because Hepatitis C will no longer be treated with interferon, so those people won’t need Promacta to deal with the impact of interferon — that may in part be true, we don’t know (or at least, I have not seen) what percentage of Promacta sales are to HCV patients, it’s a fairly new indication for the drug. But it’s certainly not entirely true — Promacta has a couple approved indications and several more possible approvals, there are a lot of clinical trials ongoing from GSK on that one.
If the short attack is correct that Promacta will collapse over the next couple years, Ligand is very much overvalued. Not worthless, but overvalued. I am not an expert on the science — I know Dr. KSS is no fan of Promacta. I invested in Ligand because of the financials, and those have continued to improve — if future indications are that Promacta sales will tail off markedly and other drugs that generate royalties for Ligand (Kyprolis, Duavee, etc.) don’t accelerate, I’ll have to reconsider… but there’s been no indication of that from analysts or from the company as of yet. So I’m in the familiar position of waiting it out for a bit to see how the next quarter looks and how sales of their royalty generating drugs are doing before I consider changing my mind or my portfolio position. Interesting news could come at any time, of course, but LGND doesn’t report again for another month or so. They do have an updated investor presentation here, FYI, if you want to see LGND’s self-marketing.
Thanks Travis.
Aluminum alloy’s strength to weight ratio along with it’s low cost make carbon fiber a distant second choice
Hey Eric… You may be right on the cost front, but believe the opposite is true with regard to s/w ratio. The use of carbon fiber in F1, Indycar, and some lower formula have transformed the sport and surely saved many lives to date.
Everyone’s looking for aerospace to be their growth market — Alcoa just bought another maker of jet engine components: http://finance.yahoo.com/news/alcoa-spend-2-85b-jet-115722023.html
And speaking of automobiles, aluminum hasn’t yet made it into autos in a huge way but that’s starting to happen now — we’ll have a lot more aluminum in cars before we have a lot of carbon fiber. Alcoa is actually more expensive than HXL right now, though many investors have bad memories of huge swings hitting AA’s price from 2000-2010 or so.
There is a fly in the ointment nobody has mentioned yet, the makers of airplanes who need to get them up and flying in order to make more (and use more carbon fiber). Boeing risks losing a key POS edge, US ExIm funding, being attacked from left and right by Congress. Airbus has govt credits okay but also has lost a key Emirates order it was counting on. And poor Bombardier, the maker of light weight low-fuel-consuming carbon fiber stuffed commuter planes and private jets is having to delay commercial launch to test some more and then test again some more. That probably means carbon fiber sales estimates forward are too optimistic.
Carbon Fiber will indeed work its way more and more into airplanes and also to cars. The first real beneficiary was Boeing when they incorporated 25% into one of their planes – this was a result of the CEO’s belief in Amory Lovins and the Rocky Mountain Institute – who designed a carbon var 10 + years ago.
FYI – CEO left Boeing and went on to become CEO of Ford – only car company that did not take government money and will be one of the leaders in hybrids and carbon in cars.
AS to whether I would buy the stock – I would not at this time
Why ?
The aerospace stocks are hot so far this year and Hexcel is under performing the group, and technically the stock has been showing lower tops and lower bottoms since the beginning of the year – NOT a good place to buy a stock – plenty of better places to put your money.
If your love HEXEL – put it on your “watch list” not your buy list.
Travis,
Interesting article. I picked up some shares today of HXL at 40.35. On another note I sold two thirds of my investment in MIL yesterday.
V/R
Tom
Travis—-Thanks for your sleuthing
Anything Hilary touts is not SAFE!
About Hexcel. I was lucky enough to have bought both HXL and ZOLT in 2012. ZOLT was bought out. I sold the HXL in January of this year. I haven’t been tempted to buy again. If I saw 35-36 I might. I definitely agree with Peter’s comment at #8.
As for Hillary Kramer, the worst beating I’ve ever taken was on a recommendation from her. Never again.
And the other Kramer is not that good either . . . STICK WITH GUMSHOE~!
Travis,
I sold my shares at a very small profit (.15 per share) in mid July. After HXL was first teased it did rise over $2 per share fairly quickly, but then dropped swiftly (after meeting expectations in earnings) to around $37 per share. Hardly the stuff or even the hint of anything that has the potential of such large returns. I get several adds a week from Kramer on a variety of repetitive issues.
V/R
Tom
HXL now trading around $50. How long were you supposed to hold it?
The last pitch I read was 39 months to get to your million. I would think you
sell the recommended stocks when they are at a high and buy the next batch.
You get 130 stock picks a year. It would be nice if gumshoe or someone would
post what those stocks are as they get them.
$175.00 re-invested for 39 months at an average profit of 25% a month = 1,053,242.94.
I use http://www.moneychimp.com/calculator/compound_interest_calculator.htm