Amphibious aircraft and quarantine: how Howmet Aerospace’s business works

Howmet Aerospace (NYSE: HWM) is an American industrial company. The coronavirus and too much reliance on Boeing have taken a toll on the company’s business. Will 2021 be a better year for the company?

What’s going on here

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Often when reporting companies, numbers are rounded, so the totals in the charts and tables may not add up.

What they make money on

The company makes its money from components for the production of complex machinery. Howmet makes cast profiles, turbine disks, and seamless rolled rings. The company’s customers come from a wide variety of industries, but the most notable demand comes from the aerospace industry.

Howmet has a fairly detailed report that says exactly what it produces and what industries its customers come from. Keep in mind that in 2020 the company split into two: everything related to rolled metal products was spun off into Arconic, so Howmet can be considered a purely aerospace business.

The largest market for the company is the U.S., but the share of foreign sales is also large.

The company’s financial sales figures in millions of dollars

	2017	2018	2019
Sales of engineered goods and intermediate blanks to other companies	6300	6798	7105
Total sales of engineered goods and intermediate blanks	6300	6798	7105
Sales of rolled steel to other companies	6540	7223	7082
In-house sales of rolled metal products	183	205	183
General sales of rolled metal products	6723	7428	7262
Total sales by two segments to other companies	12 840	14 021	14 187
Total sales by two segments within the company	183	205	183
General sales	13 023	14 226	14 730

Financial performance of the company’s profit, loss and assets in the Engineered Goods and Intermediate Blanks segment in millions of dollars

	2017	2018	2019
Operating profit	1119	1105	1390
Restructuring and other expenses	30	70	509
Loss of value of assets and depreciation	275	289	269
Investments in renovation of fixed assets of the segment	– —	407	344
Value of brand and intangible assets	– —	4186	4067
Assets in total	– —	10 494	10 034

Financial indicators of profits, losses and assets of the company in the segment of rolled steel in millions of dollars

	2017	2018	2019
Operating profit	570	481	625
Restructuring and other expenses	83	−157	81
Loss of value of assets and depreciation	243	253	233
Investments in renovation of fixed assets of the segment	– —	308	189
Value of brand and intangible assets	– —	314	426
Assets in total	– —	4845	4907

Financial indicators of the company’s profits, losses and assets in two segments in millions of dollars

	2017	2018	2019
Operating profit	1689	1586	2015
Restructuring and other expenses	113	−87	590
Loss of value of assets and depreciation	518	542	502
Investments in renovation of fixed assets of the segment	– —	715	533
Value of brand and intangible assets	– —	4500	4493
Assets in total	– —	15 339	14 941

Source: Annual report, pp. 69 (71)

Company revenue by final product destination in the engineered products and intermediate blanks segment in millions of dollars

	2017	2018	2019
Aerospace industry	4347	4722	5075
Transportation	1098	1302	1289
Industry and other	855	774	741
Total revenue	6300	6798	7105

The company’s revenue by final destination of products in the metal-roll segment in millions of dollars

	2017	2018	2019
Aerospace industry	1109	1116	1251
Transportation	2072	2550	2418
Construction and design	1269	1357	1300
Industry and other	2090	2200	2113
Total revenue	6540	7223	7082

Company revenue by final product destination in two segments in millions of dollars

	2017	2018	2019
Aerospace industry	5456	5838	6326
Transportation	3170	3852	3707
Construction and design	1269	1357	1300
Industry and other	2945	2974	2854
Total revenue	12 840	14 021	14 187

Source: Annual Report, pp. 72 (74)

Company sales by product type in millions of dollars

	2017	2018	2019
Innovative rolled metal products	5000	5604	5471
Products for engines	2965	3220	3452
Mounting Systems	1484	1531	1561
Designed structures	1023	1081	1123
Architectural aluminum systems	1069	1135	1118
Forged wheels	828	966	969
Extrusion of aluminum profiles	471	484	493
Other	120	−7	5
Total	12 960	14 014	14 192

Source: Annual Report, pp. 70 (72)

Company sales by country in millions of dollars

	2017	2018	2019
USA	8167	9137	9548
France	965	936	854
UK	721	737	732
Hungary	739	823	719
China	630	632	615
Russia	500	553	511
Germany	309	302	322
Canada	261	285	313
Japan	141	170	190
Brazil	285	214	159
Others	257	225	204
Total	12 960	14 014	14 192

Source: Company Annual Report, pp. 71 (73)

Revenue and profit for the last 12 months in billions of dollars, bottom-line margin as a percentage of revenue. Source: Macrotrends

A year full of worries

The Boeing MAX scandal did not reflect well on the company’s reputation, and the industry’s closure for quarantine and the coma of the aviation industry had a negative impact on the company’s business. At the same time, Howmet has remained profitable – and that is a definite plus.

On the other hand, the indicators of production of aircraft and components in the U.S. are growing very slowly, so we should not expect the same figures from the company in the near future.

The exact share of Boeing sales in Howmet’s revenue structure is unknown, but it is certainly large: even if Howmet does not sell anything directly to Boeing itself, it supplies parts to Boeing contractors who depend on the Boeing situation.

For example, Howmet receives 11% of its revenue from the aerospace division of General Electric, which, in turn, works mainly for Boeing. And this is not good: today Boeing is far behind Airbus – last year the American company delivered more than 3 times fewer aircraft than Airbus. The gap between the two companies is likely to grow wider as Airbus was able to capitalize well due to Boeing’s reputational losses and successfully wrested market share from the Americans. It is unlikely that the recent admission of the MAX to flights will greatly improve the situation.

But even leaving aside Boeing’s reputation problems, the flight situation remains extremely uninspiring. It is very likely that in a post-coronavirus world, people will travel far less than before, and the number of orders for planes and components will remain at a low level.

Howmet also has huge debts: $7.838 billion, of which $1.577 billion have to be closed within a year. It has about $1.8 billion in cash in its accounts, which is not much, given the size of the debt and the not particularly positive situation in this sector. And until Howmet is able to regain its previous scale of operations, there is no hope of the company returning the dividends it cancelled last year.

But things are going better in the industrial sector, which accounts for a little less than a third of the company’s sales. So we can cautiously hope that the industrial boom in America will brighten the current reality for the company.

Company sales by product type with ultimate destination “Commercial Aerospace” in millions of dollars

	Q3 2020	Q3 2019	1 Jan – 30 Sep 2020	1 Jan – 30 Sep 2019
Products for engines	199	571	1018	1689
Mounting Systems	169	267	650	803
Designed structures	104	226	432	672
Total	472	1064	2100	3164

Company sales by product type with the final destination “Military Aerospace” in millions of dollars

	Q3 2020	Q3 2019	1 Jan – 30 Sep 2020	1 Jan – 30 Sep 2019
Products for engines	142	120	394	350
Mounting Systems	37	41	120	115
Designed structures	82	65	216	194
Total	261	226	730	659

Company sales by product type with ultimate destination “Commercial Vehicle” in millions of dollars

	Q3 2020	Q3 2019	1 Jan – 30 Sep 2020	1 Jan – 30 Sep 2019
Products for engines	– —	5	– —	17
Mounting Systems	38	59	118	179
Forged wheels	172	241	476	754
Total	210	305	594	950

Company sales by product type with the final destination “Industry and other” in millions of dollars

	Q3 2020	Q3 2019	1 Jan – 30 Sep 2020	1 Jan – 30 Sep 2019
Products for engines	144	148	439	436
Mounting Systems	27	24	94	88
Designed structures	20	27	62	77
Forged wheels	– —	– —	– —	−2
Total	191	199	595	599

Company sales by product type, total in millions of dollars

	Q3 2020	Q3 2019	1 Jan – 30 Sep 2020	1 Jan – 30 Sep 2019
Products for engines	485	844	1851	2492
Mounting Systems	271	391	982	1185
Designed structures	206	318	710	943
Forged wheels	172	241	476	752
Total	1134	1794	4019	5372

Source: Company quarterly report, p. 16

Number of passengers per day in U.S. airport screening areas

	2019	2020	2021
January 17	2 139 242	2 000 260	810 654
January 16	1 786 012	1 781 893	690 438
January 15	1 605 758	2 374 075	903 039
January 14	1 886 642	2 242 656	803 688
January 13	1 970 450	1 876 782	567 401
January 12	1 604 862	1 691 205	520 117
January 11	1 959 788	1 992 453	708 117
January 10	1 995 200	2 183 734	886 536
January 9	1 739 642	1 687 974	709 444
January 8	1 733 739	2 072 543	772 471
January 7	2 044 043	2 034 472	771 734
January 6	2 229 391	1 815 040	665 855
January 5	1 975 947	1 806 480	766 594

Summary

Howmet is not an uninteresting issuer. And the company is relatively inexpensive: its P/E is 27.92. But it depends too much on the situation in the U.S. aerospace industry. Howmet’s success or failure depends on what is beyond its control. When will flight volume reach “pre-pandemic” levels? How high will the demand for airplanes be? There are too many unknowns, so the idea of investing in Howmet seems too risky for now.