Editor's note: This Breakout Stocks alert was originally sent to subscribers July 19 at 1:57 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
We are adding Hexcel ( HXL) to our radar screen. The stock was recently trading at $15.25, and strong demand for carbon fiber and other composite materials used for improving manufacturing efficiencies could drive double-digit percentage earnings growth for Hexcel for at least two more years. Hexcel appeared on our radar screen in late June when the company said manufacturing delays by key customer Airbus will weigh on 2006 revenue results. Airbus, which is building new jets that contain large amounts of composite materials in the fuselage and other parts, has had production problems as it rushes to meet strong end-market demand for its new A380 jumbo jet. However, we believe Hexcel's 40% decline since May 11 discounts a large degree of risk to future earnings results, and we will consider adding shares to the model portfolio as we gain more confidence in Airbus' ability to begin deliveries of the superjumbo A380 in 2007. The company is a leading provider of materials such as carbon fiber and reinforcement fabrics that are used to build both commercial and military aircraft, body armor, automobiles, wind turbines and helicopter blades, to name just a few applications. Rising metal and energy prices have pushed up manufacturing costs and the cost of buying and operating cars and planes. We believe this is a driving force behind a shift in production strategy by large corporations such as Boeing ( BA), Airbus and BMW to incorporate stronger, lightweight and cost-effective composite materials into production. Hexcel generates nearly half of its revenue from the aerospace industry, with Boeing and Airbus accounting for nearly 41% of its revenue in 2005. As such, the company is well-positioned to benefit from Airbus' A380 planes, which Airbus should begin shipping to airlines in late 2007 and 2008. Both the A380 and Boeing's soon-to-be-produced 787 Dreamliner contain more than 20% composite materials, and Hexcel will be the primary supplier of composites to Airbus for the A380. For comparative purposes, Airbus' and Boeing's past plane models were built with less than 10% composite materials. Rushed engineering work on both companies' new planes led to aggressive production schedules for Boeing and Airbus, and recent announcements from Airbus indicate it is running behind by about six months on the manufacturing front. This led to the late-June revenue-growth warning from Hexcel. While not specific, the company indicated that full-year 2006 revenue could fall short of its prior guidance for about $1.27 billion. Even so, the company noted that general demand from other areas of the aerospace market remains strong and could drive 10% full-year revenue growth in Hexcel's aerospace business.