On Wednesday, RBC Capital adjusted its stance on L3Harris Technologies (NYSE:LHX), moving the company's rating from Outperform to Sector Perform and lowering the price target to $240 from the previous $250.
The revision follows observations from the second quarter of 2024 earnings cycle in the Aerospace & Defense (A&D) sector, which showed a modest top-line growth of approximately 10% organically for defense stocks. Despite limited margin improvement, these stocks have seen an average increase of 7% in the third quarter of 2024.
The analyst noted a change in market sentiment towards defense stocks, suggesting that the positive momentum could continue. However, with other defense companies like General Dynamics (NYSE:GD) and Lockheed Martin (NYSE:LMT) preferred, RBC Capital has revised its recommendation for L3Harris Technologies to Sector Perform. The commercial aerospace original equipment (OE) growth was around 12% for the quarter, whereas aftermarket (AM) growth was in the high teens.
The report also indicates a tempered confidence in the second half of 2024 regarding the pace of improvement in aircraft deliveries. Consequently, the firm has also downgraded Hexcel Corporation (NYSE:HXL) to Sector Perform. The analyst pointed to the engine supply chain as a limiting factor for production rate increases, with some suppliers not exhibiting the same urgency as airframe original equipment manufacturers (OEMs) due to price leverage and AM fundamentals.
Despite the challenges, the aftermarket is still seen as having favorable fundamentals, although growth is expected to normalize. For aftermarket exposure, the firm's top picks include TransDigm Group Incorporated, General Electric (NYSE:GE), and Heico Corporation. The report concludes with a lowered Airbus delivery estimate for 2024 to 760 units, reflecting the ongoing constraints within the engine supply chain.
In other recent news, Hexcel Corporation reported a 10% year-over-year increase in second-quarter sales, totaling $500 million. However, due to supply chain challenges and a reduction in Airbus deliveries, Hexcel has revised its 2024 guidance, now anticipating sales to range between $1.9 billion and $1.98 billion, with adjusted diluted earnings per share of $2.02 to $2.18.
Additionally, Jefferies has maintained a 'Hold' rating on Hexcel stock, highlighting the company's strong long-term contracts, such as the notable agreement with Airbus extending through 2030. The firm also pointed out Hexcel's preparedness for the next rate increase in production and the company's strategic focus on maintaining supply chain efficiency. Despite a slight decline in the defense segment and a projected double-digit decline in the Industrial segment for the year, Hexcel's automotive market remains robust.
InvestingPro Insights
As the article discusses the recent downgrade of Hexcel Corporation (HXL) to Sector Perform, it's important to consider the company's financial health and market performance to understand the broader picture. According to InvestingPro data, Hexcel's market capitalization stands at $5.07 billion, with a high price-to-earnings (P/E) ratio of 48.44, which indicates that the stock may be trading at a premium compared to its earnings. However, the company's liquid assets surpass its short-term obligations, which points to a stable financial position in the near term.
InvestingPro Tips highlight that management has been actively repurchasing shares, signaling confidence in the company's value. Additionally, Hexcel is trading near its 52-week low, which could attract investors looking for potential upside. With a moderate level of debt and analysts predicting profitability for the current year, the company's financials could be appealing to certain investors. For those interested in diving deeper into Hexcel's prospects, InvestingPro offers additional tips that can be accessed on their platform.
It's worth noting that while 15 analysts have revised their earnings estimates downwards for the upcoming period, the company's revenue has grown by 8.42% over the last twelve months as of Q2 2024. This growth, coupled with a profitable track record over the same period, provides a nuanced view of Hexcel's performance amidst the industry's challenges. For a more comprehensive analysis, readers can explore the 7 additional tips available on InvestingPro.
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