On Thursday, Morgan Stanley (NYSE:MS) downgraded shares of Hexcel Corp . (NYSE:HXL) from Equalweight to Underweight and reduced the price target to $66 from $70. The decision followed the company's Investor Day held in New York City on Tuesday, February 20, 2024, which showcased Hexcel's positive multi-year growth outlook across its Aerospace, Defense, and Industrial markets. Despite this, the analyst expressed concerns that the growth potential is already reflected in the current consensus.
The company provided a mid-term business outlook for 2024-2026, detailing expectations for Sales, EBITDA, Adjusted EPS, and FCF. However, Morgan Stanley's analysis suggests a more cautious approach, with their operating estimates remaining below the consensus. This caution stems from anticipated delays in the ramp-up to new aircraft production due to ongoing supply chain issues, which are supported by proprietary surveys conducted by Morgan Stanley.
The analyst also noted Hexcel's stock is trading at a premium compared to historical aerospace upcycle multiples based on P/E ratios. Given the premium valuation and potential risks associated with supply chain challenges, the firm sees the risk-reward balance for Hexcel as being skewed to the downside. This led to the downgrade and the setting of a new price target.
Morgan Stanley highlighted that while there are better risk-adjusted opportunities within their coverage, such as TDG, HWM (BMV:HWM), and FTAI, Hexcel's management's high-end outlook could be considered the Bull case scenario with a potential valuation of $84. Conversely, the Bear case scenario sees a valuation of $50, factoring in the risks of slower-than-expected aircraft production rate increases and possible margin compression due to lower volumes.
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