Hexcel is the only U.S publicly traded pure play supplier of aerospace-grade carbon fiber composites.[1]

Investment thesis

Carbon Fiber is a material only a few firms in the world have the intellectual property, (IP), to develop, and is 30% lighter than aluminum, but much stronger.[2] Hexcel plays in a rational market with 2 other main players in Teijin and Toray.[3] Carbon fiber per plane keeps increasing, which means the revenue per plane for Hexcel is as well.[4] Further, we believe Boeing and Airbus have decade’s long backlogs of orders. We believe that the business should see free cash flow improve as capital expenditures from recent plant additions abate.

Confirmation through research

We believe HXL is in a rational market in a product with strong IP . We believe thanks to the IP, complex manufacturing process, and how long it takes to become certified, it is difficult for new players to enter. In terms of the Boeing and Airbus backlog, the IATA, the International Air Transport Association, has forecasted the number of passengers to double by 2036.[5] Because of this demand, and lack of airplane supply, we believe there is at least a 10-year backlog.[6] As mentioned previously, we believe carbon fiber content per plane is increasing.[7]

Variant Perception

We believe that the market is not assigning a fair value to the business considering what we believe is the company’s moat, rational market, consistent earnings, and earnings growth. Further, we believe there is upside to operating margins, and based on our estimates, with greater free cash flow in the next few years, we believe there will be an even greater ability to return cash to shareholders.