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Jin Bin Liu

HXL AT A GLANCE

P/E ► 13.4 AVG EV/EBITDA ► 9.18 AVG ROA ► 8.6% AVG ROE ► 14.4% AVG Debt to Equity ► 1.08 AVG Current Ratio ► 2.81 AVG Interest Coverage Ratio ► 4.84 AVG

 

 

 

 

 

 

Hexcel (HXL), an advanced composites company that makes everything from skis to aircraft parts, is the largest producer of carbon fiber in the US.^[1]. In 2007, Hexcel completed the divestiture of its ballistics, electronics, and architectural product lines to focus on carbon fiber products, a market that is expected to grow to nearly $10 billion in 2010.^[2][3] Part of this potential is realized in the commercial aerospace market.

The price of crude oil has risen from around $20 per barrel in 2000 to record-highs of over $140 in mid-2008 ^{[4] [5]}, and airlines are demanding more efficient aircraft to cope with rising fuel costs. The aerospace industry is becoming increasingly dependent on carbon fiber composites, which are lighter and stronger than conventional metals^[6], making them perfect materials for lighter, fuel-efficient jets. The increase in aerospace demand for composites is evident in the make-up of the latest aircraft models, like Boeing's 787 Dreamliner and Airbus's A350 XWB. Both models have about 50% of their weight content as composites.^[7][8] At the end of May in 2008, Hexcel was awarded a contract to supply composite materials for A350 XWB aircraft through 2025.^[9]

The commercial aerospace market is also growing due to increasing global air traffic. From 1985 to 2007, global air traffic has grown more than 5% every year.^[10][11] The aerospace market is the most important contributor to Hexcel's sales. In 2007, aerospace sales, including commercial and military, contributed to 78% of Hexcel's net sales.^[12]

Company Overview

Hexcel is an advanced composites company that makes everything from recreational equipment like bikes and skis to aircraft, satellites, and wind turbine blades. Although the company averaged double-digit growth in net sales over the past five years, its net income has declined in the last few years.^[13] The increase in net income in 2005 is due mostly to a reversal of valuation allowance against deferred taxes.^[14] Without this reversal, net income that year would have been a mere $12.0 million instead of the reported $131.2 million.^[13] Beginning in 2006, Hexcel decided to narrow its focus to carbon fiber products and began divestiture of its ballistics, electronics, and architectural product lines, which was completed during 2007.^[2] Beginning in 2007, it operates only two business segments, Composite Materials and Engineered Products, and sells to three markets: commercial aerospace, space & defense, and industrial markets.^[15]

Hexcel Financials 2007^[13]

Business and Financial Metrics

2007 Sales by Segment^[12]

2007 Sales by Market^[12]

Business Segments

• Composite Materials (80% of net sales in 2007): Hexcel produces its own carbon fiber, which is the main raw material for all its other products. By the end of 2009, Hexcel’s carbon fiber production capacity will be 7000 tons.^[18] In addition to carbon fiber, this segment of Hexcel also produces reinforcement fabrics, pre-impregnated materials, structural adhesives, and honeycomb structures.^[15] Applications for these products include skis, bikes, wind turbine rotor blades, aeroengines and yachts.^[15] Of the 11.6% increase in net sales in 2007, the Composite Materials segment accounted for 68.8% of that increase.^[12]

• Engineered Products (20% of net sales in 2007): This segment of Hexcel produces composite structures and machined honeycomb that are used almost exclusively for aircraft structures and components.^[19] The primary end-uses for the products of this segment include wing panels, flight deck panels, helicopter blades, door liners, flaps, and wings.^[19] Of the 11.6% increase in net sales in 2007, the Engineered Products segment accounted for 31.2% of that increase.^[12]

Key Trends and Forces

Rising prices for oil and natural gas increase demand for carbon composites

Increases in the price of crude oil is driving up fuel prices.^[20] The price of crude oil has risen from around $20 per barrel in 2000 to record-highs of over $140 in mid-2008. ^{[21] [22]} To make their products more fuel-efficient, manufacturers of planes and automobiles are turning to carbon composites as the alternative to traditional steel and aluminum parts.^[23] Carbon composites are lighter and non-corroding.^[24] The "Very Light Jet" market, which is trending toward all-composite airframes, expects to deliver 15,000 aircraft by 2015 according to 2007 estimates.^[25]

Strong aerospace demand boosts sales for Hexcel

• Commercial Aerospace Market Segment - Aerospace demand is being driven by increasing passenger traffic. From 1985 to 2006, global passenger traffic has increased at a rate of more than 5% every year.^[10] In 2007, passenger traffic increased by 5.5% according to the International Civil Aviation Organization.^[11] In 2005, Boeing and Airbus received orders for 2043 aircraft, which was a record.^[26] Orders dipped to 1,868 in 2006 and rose again and surpassed the high in 2005 at 2,871 orders.^[27][28] Hexcel benefits from this increasing demand because rising fuel prices are causing aircraft manufacturers to use carbon composites, which are lighter and stronger than conventional metals.^[20] In 2007, commercial aerospace accounted for 53% of Hexcel’s net sales and of that 53%, about 74% were sales to Boeing and Airbus.^[29] Boeing’s 787 Dreamliner is expected to launch in 2009 and will have about 50% of its weight as composite content.^[7] At the end of 2007, Boeing had already recorded 857 orders for the 787. ^[30] Airbus will launch the A350 XWB, which also has about 50% composite content by weight, in 2013.^[8]

• Space & Defense Market Segment - In addition to supplying composites for companies in the commercial aerospace market like Boeing and Airbus, Hexcel is qualified to supply to 80 military aircraft and helicopter programs.^[29] These programs, like the commercial market, are trending toward lighter materials, like carbon composites, in the face of rising fuel prices.^[20] From 2001 to 2008, spending by the Department of Defense has increased 74%.^[31] In 2008, the Air Force budget was $134.6 billion^[32], nearly double the amount in 2001.^[33] After 2009, however, the national defense budget is expected to drop from $675.1 billion to $519.5 billion in 2013.^[34]

• "Very Light Jet" market - The Very Light Jet, or VLJ, is becoming an increasingly popular alternative for corporate fliers. The VLJ is half as cheap as the traditional corporate jet^[35] and more cost-effective than commercial airlines because of lower fuel costs and the use of lighter composites materials.^[36] The price of VLJs range from $1 to $3 million.^[25] Estimates in 2007 predict the delivery of 15,000 VLJs by 2015.^[25] Although some manufacturers continue to use aluminum frames and composites for secondary structures, many others are proceeding to produce VLJs with all-composite airframes, expanding the market for carbon fiber materials (like those made by Hexcel).^[25]

Hexcel benefits from the high price of carbon fiber

Due to strong demand from the aerospace industry^[37], the price of carbon fiber is high, around $10 per pound at the beginning of 2007.^[38] From 2004 to 2007, the cost of carbon fiber has increased by more than 65%.^[39] In comparison, the price for aluminum is about $1.30 per pound in mid-2008.^[40] However, comparisons by weight are misleading since carbon composites are 15 times stronger than aluminum.^[41][42]

Since Hexcel produces its own carbon fiber, it is insulated from high prices and even benefits by selling carbon fibers that it does not use to third parties.^[19] While strong demand will drive prices up, it is also expected to drive increases in production, which will eventually bring prices back down. In 2007, worldwide output of carbon fiber was about 35,000 tons.^[43] The output in 2010 is expected to be 53,000 tons.^[43] In comparison, Hexcel is projected to have a carbon fiber production capacity of 7,000 tons by the end of 2009.^[18]

Competition

The leading carbon fiber companies include:

• Cytec Industries (CYT) – Cytec’s Engineered Materials division produces carbon composites for aerospace applications.^[44]
• Mitsubishi Rayon Co., Ltd. – Produces carbon fibers, intermediate materials, and fabricated composite products. ^[45]
• SGL Technologies – Produces oxidized fiber, partially carbonized fiber, and heavy-tow carbon fiber.^[46]
• Toho Tenax Co., Ltd. – Mass-produces polyacrylonitrile based fibers.^[47]
• Toray Industries Inc (TRYIY) – One of Toray’s business segment is Carbon Fiber Composite Materials.^[48]
• Zoltek (ZOLT) – Zoltek has 85% of the commercial aircraft brake pad market.^[49]

Toray, Mitsubishi Rayon and Teijin, Ltd. have 70% of the world's carbon fiber market share.^[50] Toray alone has 30% of the world's carbon fiber market share.^[50]

References

1. ↑ About Hexcel
2. ↑ ^{2.0 2.1} Hexcel Reports 2006 Second Quarter Results
3. ↑ Growth Opportunities in the Carbon Fiber Market 2004-2010: Summary
4. ↑ zFacts: "Crude Oil Prices Drive up Cost of U.S. Addiction"
5. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
6. ↑ Fibre reinforced composites in aircraft construction
7. ↑ ^{7.0 7.1} Boeing 787 Dreamliner will provide new solutions for airlines, passengers
8. ↑ ^{8.0 8.1} Airbus A350 XWB long-range, extra-wide-bodied airliner
9. ↑ Hexcel to Supply Carbon Fiber Composites for Airbus A350 XWB Primary Structures
10. ↑ ^{10.0 10.1} Hexcel Annual Report 2007 P.13
11. ↑ ^{11.0 11.1} Hexcel Annual Report 2007 P.15
12. ↑ ^{12.0 12.1 12.2 12.3 12.4} Hexcel Annual Report 2007 P.17
13. ↑ ^{13.0 13.1 13.2 13.3 13.4 13.5} Hexcel Annual Report 2007 P.10
14. ↑ Hexcel Reports 2005 Fourth Quarter and Year-End Results
15. ↑ ^{15.0 15.1 15.2} Hexcel Annual Report 2007 P.11
16. ↑ ^{16.0 16.1 16.2} Composite Trends 2007
17. ↑ ^{17.0 17.1 17.2} Hexcel Announces $180 Million Additional Carbon Fiber Expansion Program
18. ↑ ^{18.0 18.1} Hexcel opens first carbon fiber plant in Spain
19. ↑ ^{19.0 19.1 19.2} Hexcel Annual Report 2007 P.12
20. ↑ ^{20.0 20.1 20.2}
21. ↑ zFacts: "Crude Oil Prices Drive up Cost of U.S. Addiction"
22. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
23. ↑ Recyclable Carbon Fiber: Extreme Fuel-Efficiency
24. ↑ Advantages of Carbon Composites
25. ↑ ^{25.0 25.1 25.2 25.3} Very Light Jets Are Taking Off from Ultralight Living
26. ↑ Aerospace: current signals could steer you wrong
27. ↑ Boeing Sets Third Consecutive Record in Commercial Airplane Orders in 2007
28. ↑ Airbus Orders & Deliveries: 1992-2007 Results
29. ↑ ^{29.0 29.1} Hexcel Annual Report 2007 P.14
30. ↑ Hexcel Annual Report 2007 P.16
31. ↑ U.S. Federal Budget 2008 P.5
32. ↑ Air Force Budget 2008 P.6
33. ↑ Air Force Budget 2001 P.1
34. ↑ National Defense Budget Estimates for FY 2009 P.5
35. ↑ Feeling the Need for Speed
36. ↑ Very Light Jets Creating A Demand For Composites
37. ↑ Why Bike Prices Are Shifting Higher
38. ↑ Zoltek Rewards True Believers
39. ↑ Industry Experts Call of Carbon Fiber Commodity Trading
40. ↑ Metal Prices & News on the Internet
41. ↑ Here comes the everyday carbon fiber car
42. ↑ Wood, Alumnium, Steel and Composites
43. ↑ ^{43.0 43.1} Carbon fiber makers see broad use of it in cars
44. ↑ Cytec Engineered Materials
45. ↑ Mitsubishi Rayon Co., Ltd. Fibers
46. ↑ SGL Carbon Aktiengesellschaft Company Profile
47. ↑ Toho Tenax
48. ↑ Carbon Fiber Composite Materials
49. ↑ Zoltek Rewards True Believers
50. ↑ ^{50.0 50.1} Carbon fiber makers see broad use of it in cars
51. ↑ Hexcel Annual Report 2007: Selected Financial Data P.12
52. ↑ ^{52.0 52.1 52.2 52.3 52.4 52.5 52.6} Fiber demand and supply
53. ↑ Cytec Annual Report 2007: Management’s Discussion & Analysis P.18
54. ↑ Mitsubishi Rayon Annual Report: Business Performance Breakdown by Segment P.12
55. ↑ ^{55.0 55.1} Mitsubishi Rayon to increase carbon fiber production capacity
56. ↑ SGL Annual Report 2007: Business Unit Performance P.59
57. ↑ ^{57.0 57.1} SGL Carbon Aktiengesellschaft · 6-K · For 11/29/07
58. ↑ TOHO Tenax Annual Report: Review of Operations P.4
59. ↑ ^{59.0 59.1} TENAX® Capacity Increase
60. ↑ Financial Data: Business Segments
61. ↑ Toray to Expand Production Capacity of PAN-based Carbon Fiber
62. ↑
63. ↑ Zoltek Annual Report 2007: Management’s Discussion & Analysis P.8
64. ↑ For Big Carbon-Fiber Maker, The Answer Is Blowing In The Wind
65. ↑