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Hexcel (HXL) Down 2.9% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Hexcel (HXL). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Hexcel due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Hexcel Q2 Earnings Miss Estimates, Sales Decline Y/Y

Hexcel Corporation reported second-quarter 2020 adjusted earnings of 8 cents per share, which missed the Zacks Consensus Estimate of 20 cents by 60%.

In the quarter under review, the company posted GAAP loss of a penny against the prior-year quarter’s earnings of 94 cents.

Significant reduction in demand for its products owing to the effects of the COVID-19 pandemic and the margin mix impact of lower carbon fiber sales resulted in the drop in Hexcel’s operating margin. This in turn dragged down the company’s quarterly earnings.  

Total Sales

Net sales totaled $378.7 million, surpassing the Zacks Consensus Estimate of $344 million by 10.2%. However, the top line witnessed a decline of 37.8% from the year-ago quarter’s $609 million.

The year-over-year deterioration in sales can be primarily attributed to the impacts of the pandemic, which dealt a huge blow to the aerospace industry.

Operational Update

Hexcel's gross margin was 14.5% in the second quarter, reflecting year-over-year contraction of 1320 basis points.

Selling, general and administrative and R&T expenses for the second quarter of 2020 fell 34% year over year, thanks to the company’s cost-reduction initiatives, including headcount reductions and lower discretionary spending.

The company’s adjusted operating income amounted to $19.5 million in the quarter compared with $115.1 million in the year-ago period.

Quarterly Performance

Commercial Aerospace: Net sales were down 51% year over year to $203.9 million. Lower sales across all major programs, with the Airbus A350 driving the largest quarterly revenue decline resulted in this unit’s poor top-line performance.

Space and Defense: Net sales dropped 3% year over year to $108.4 million on account of lower demand from a number of international space & defense programs.

Industrial: Net sales declined 17.7% year over year to $66.4 million, primarily due to lower wind energy sales on account of soft demand, arising from the COVID-19 pandemic.

Financial Details

As of Jun 30, 2020, cash and cash equivalents were $257.2 million compared with $64.4 million as of Dec 31, 2019.

Long-term debt totaled $1,265.7million as of Jun 30, 2020, up from$1,050.6 million as of 2019-end.

At the end of second-quarter 2020, cash generated from operating activities was $73.6 million compared with $157.2 million in the prior year.

Post first-quarter 2020, Hexcel had temporarily suspended its share repurchase program and quarterly dividend payouts due to market volatility. So the company made no share repurchase in the second quarter. Its remaining authorization under the share repurchase program as of Jun 30, 2020 was $217 million.

Hexcel’s adjusted free cash outflow at the end of second-quarter 2020 was $33.2 million compared with $57.9 million at the end of the prior-year period.

2020 Guidance

Hexcel continues to withhold its financial guidance in the wake of the ongoing market uncertainties as a result of the pandemic.
 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -28.26% due to these changes.

VGM Scores

Currently, Hexcel has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Hexcel has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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