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

Howmet stock-reviews

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

Our readers have long asked us to start parsing the reporting and business fundamentals of U.S. issuers. Suggest in the comments the companies whose analysis you would like to read.

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

201720182019
Sales of engineered goods and intermediate blanks to other companies630067987105
Total sales of engineered goods and intermediate blanks630067987105
Sales of rolled steel to other companies654072237082
In-house sales of rolled metal products183205183
General sales of rolled metal products672374287262
Total sales by two segments to other companies12 84014 02114 187
Total sales by two segments within the company183205183
General sales13 02314 22614 730

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

201720182019
Operating profit111911051390
Restructuring and other expenses3070509
Loss of value of assets and depreciation275289269
Investments in renovation of fixed assets of the segment– —407344
Value of brand and intangible assets– —41864067
Assets in total– —10 49410 034

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

201720182019
Operating profit570481625
Restructuring and other expenses83−15781
Loss of value of assets and depreciation243253233
Investments in renovation of fixed assets of the segment– —308189
Value of brand and intangible assets– —314426
Assets in total– —48454907

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

201720182019
Operating profit168915862015
Restructuring and other expenses113−87590
Loss of value of assets and depreciation518542502
Investments in renovation of fixed assets of the segment– —715533
Value of brand and intangible assets– —45004493
Assets in total– —15 33914 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

201720182019
Aerospace industry434747225075
Transportation109813021289
Industry and other855774741
Total revenue630067987105

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

201720182019
Aerospace industry110911161251
Transportation207225502418
Construction and design126913571300
Industry and other209022002113
Total revenue654072237082

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

201720182019
Aerospace industry545658386326
Transportation317038523707
Construction and design126913571300
Industry and other294529742854
Total revenue12 84014 02114 187

Source: Annual Report, pp. 72 (74)

Company sales by product type in millions of dollars

201720182019
Innovative rolled metal products500056045471
Products for engines296532203452
Mounting Systems148415311561
Designed structures102310811123
Architectural aluminum systems106911351118
Forged wheels828966969
Extrusion of aluminum profiles471484493
Other120−75
Total12 96014 01414 192

Source: Annual Report, pp. 70 (72)

Company sales by country in millions of dollars

201720182019
USA816791379548
France965936854
UK721737732
Hungary739823719
China630632615
Russia500553511
Germany309302322
Canada261285313
Japan141170190
Brazil285214159
Others257225204
Total12 96014 01414 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 2020Q3 20191 Jan – 30 Sep 20201 Jan – 30 Sep 2019
Products for engines19957110181689
Mounting Systems169267650803
Designed structures104226432672
Total472106421003164

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

Q3 2020Q3 20191 Jan – 30 Sep 20201 Jan – 30 Sep 2019
Products for engines142120394350
Mounting Systems3741120115
Designed structures8265216194
Total261226730659

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

Q3 2020Q3 20191 Jan – 30 Sep 20201 Jan – 30 Sep 2019
Products for engines– —5– —17
Mounting Systems3859118179
Forged wheels172241476754
Total210305594950

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

Q3 2020Q3 20191 Jan – 30 Sep 20201 Jan – 30 Sep 2019
Products for engines144148439436
Mounting Systems27249488
Designed structures20276277
Forged wheels– —– —– —−2
Total191199595599

Company sales by product type, total in millions of dollars

Q3 2020Q3 20191 Jan – 30 Sep 20201 Jan – 30 Sep 2019
Products for engines48584418512492
Mounting Systems2713919821185
Designed structures206318710943
Forged wheels172241476752
Total1134179440195372

Source: Company quarterly report, p. 16

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

201920202021
January 172 139 2422 000 260810 654
January 161 786 0121 781 893690 438
January 151 605 7582 374 075903 039
January 141 886 6422 242 656803 688
January 131 970 4501 876 782567 401
January 121 604 8621 691 205520 117
January 111 959 7881 992 453708 117
January 101 995 2002 183 734886 536
January 91 739 6421 687 974709 444
January 81 733 7392 072 543772 471
January 72 044 0432 034 472771 734
January 62 229 3911 815 040665 855
January 51 975 9471 806 480766 594
Source: USA Transportation Security Administration

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.

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