Howmet Aerospace Inc. HWM has been on a great run on the bourses lately as the stock was hovering at more than $97 per share in the last three trading sessions. Shares of the advanced engineered solutions provider for the aerospace and transportation industries closed at $98.63 on Monday, close to its 52-week high of $98.97.

Over the past six months, the stock has surged 46.4%, outpacing the S&P 500 composite and the sub-industry’s growth of 9.4% and 18%, respectively. The company has also outperformed other industry players like KBR, Inc. KBR and Mayville Engineering Company, Inc. MEC, which have returned 5.3% and 41.4%, respectively, over the said time frame.

HWM Outperforms Industry & S&P 500

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The stock is also trading above both its 50-day and 200-day moving averages, indicating solid upward momentum and price stability. This reflects a positive market sentiment and confidence in the company's financial health and long-term prospects.

HWM Shares Trade Above 50-Day and 200-Day SMA

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Factors Favoring the Company

The strongest driver of Howmet’s business at the moment is the commercial aerospace market. The strength in air travel continues, as it has through 2023, with wide-body aircraft demand also picking up, supporting continued OEM spending. Pickup in air travel has been positive for the company as the increased usage of aircraft spurs spending on parts and products that the company provides. Solid demand for air travel is also encouraging airlines to purchase more aircraft, which is again driving its sales.

In the second quarter of 2024, revenues from the commercial aerospace market increased 27% year over year, constituting more than 50% of the company’s business. The sustained strength was attributed to new, more fuel-efficient aircraft with reduced carbon emissions and increased spare demand for engines. While overall build rates remain strong, production issues at Boeing have materially impacted that business, partially offsetting other strengths.

Expanding defense budget remains another growth catalyst for Howmet. While the commercial aerospace market has remained the major driver for the company, the defense side of the industry has also been witnessing positive momentum, cushioned by steady government support. The company has been witnessing robust orders for engine spares for the F-35 program and spares and new builds for legacy fighters.

It’s worth noting that in December 2023, the U.S. Government passed the defense policy bill that authorizes a record $886 billion in annual military spending, thereby increasing the nation's total national security budget by about 3%. Such improved budgetary provisions set the stage for Howmet, focused on defense business to win more contracts, which is likely to boost its top line in the quarters ahead.

Howmet’s sound liquidity position is an added strength. Exiting the second quarter, the company’s cash equivalents and receivables were $1.52 billion as against short-term maturities of $782 million. Howmet generated net cash of $574 million from operating activities in the first six months of 2024, much higher than the $252 million generated in the year-ago period. It also generated a healthy free cash flow of $437 million in the first half of the year.

The company also remains committed to increasing shareholder value through dividend payouts and share repurchases. For instance, in the first six months of the year, it paid dividends worth $42 million and repurchased shares for $210 million. In July 2024, the company hiked its dividend by 60% to 8 cents per share (annually: 32 cents). In the same month, the company’s board also approved an increase in the company’s share repurchase program by $2 billion to $2.487 billion of its common stock.

Better-Than-Industry Returns

Howmet’s trailing 12-month return on equity (ROE) is indicative of its growth potential. ROE for the trailing 12 months is 23.03%, higher than the industry’s 19.21%. This reflects the company’s efficient usage of shareholder funds.

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Return on Assets is 8.87%, ahead of the industry’s 7.19%, indicating that the company has been utilizing its assets efficiently to generate returns.

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Earnings Estimate Revision

Earnings estimates for HWM have moved north over the past 60 days, reflecting analysts’ optimism.

The Zacks Consensus Estimate for 2024 earnings is pegged at $2.59 per share, suggesting year-over-year growth of 40.8%. The consensus mark for 2025 earnings is pinned at $3.16 per share, indicating a year-over-year increase of 21.9%. As earnings estimates increase, the stock is likely to follow suit.

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Stock Valuation

Despite the positives, Howmet’s lofty valuation remains a concern. The stock trades at a forward 12-month price-to-earnings (P/E) ratio of 32.82X, higher than the industry average of 24.25X. Also, it is overvalued compared with its peer, Sterling Infrastructure, Inc. STRL, which is trading at 25.14X. This elevated valuation could make the stock vulnerable to further pullbacks if market sentiment sours.

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Our Final Take

HWM’s solid momentum in the commercial and defense aerospace markets, driven by solid build rates, wide-body aircraft recovery and robust defense budget, bodes well for growth. Given the strength in most of its served markets, Howmet has built a sound liquidity position that supports its shareholder-friendly policies. Despite its expensive valuation, given the positive analyst sentiment and its growth prospects, the time appears right for potential investors to bet on this Zacks Rank #2 (Buy) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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