Howmet- A "New" Face In Aerospace

Howmet Aerospace (HWM), the former Arconic Inc., became independent on April 1; it is a $10.6 billion company that targets the aerospace & defense, and commercial transportation markets.

The company offers jet engine components, aerospace fastening systems, and titanium structural parts for mission-critical performance and efficiency in aerospace and defense applications, as well as forged wheels for commercial transportation.

The company faces challenges due to its exposure to the 737 MAX and COVID-19. But it has now endured its worst quarter of the pandemic, and the outlook is brighter. Management has raised guidance and restarted the share buyback program. The balance sheet is strengthening.

Looking ahead, management expects trends in commercial aerospace-related revenue to improve as inventories are corrected. It also looks for stronger growth in industrial gas turbines, a recovery in the Forged Wheels business, and continued strength in defense aerospace (F-35 Joint Strike Fighter).

We expect further growth next year and are raising our 2021 estimate to $0.90 from $0.85. Our five-year earnings growth rate forecast is 8%, as management works to restore margins to the high-teens, low-20s level.

We think that HWM shares are attractively valued at recent prices near $24. By our calculations, the 2021 P/E ratio is 20.3, in line with the market multiple. Earnings are now expected to fall 57.6% in 2020 before rebounding 113.6% in 2021.

From a technical standpoint, the shares have been in a bullish pattern of higher highs and higher lows that dates to a double-bottom in mid-May 2020.

We think Howmet has the ability to double its current earnings over the next 3-4 years. Our target price of $30 implies an industry average multiple on those normalized earnings.

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