Small-Cap Spotlight: Can Hexcel Excel?

So Hexcel's potential is clear, but my job is to determine whether this company is a good investment; with shares trading at $26 -- 27 times next year's earnings -- I believe most of this growth potential is factored into the stock.

According to Capital IQ, Hexcel is expected to grow earnings by 18% annually over the next three years. In fact, while demand in aerospace is highlighted above, sales in this segment grew only 13% from last year. Hexcel's balance sheet is less than stellar too, with $293 million in debt and only $31 million in cash.

The company has been upfront with its growth plans, and it plans to spend $180 million on its expansion program. But this comes on top of an ongoing $100 million program that is expected to be completed in mid-2008. Management is quick to point out that it reduced its debt levels by $75 million in the quarter, but this was from the one-time sale of its electronics ballistics and industrial reinforcement product lines, which yielded about $62 million.

Also, while favorable macro trends, including higher energy prices, bode well for Hexcel, the weak dollar is actually a burden. Management mentioned last quarter that a weaker dollar does not help its bottom line, as it has a fair amount of dollar sales matched with euro and pound costs.