Armor, Air, Wind, and Space

12/03/2004 12:00 am EST


Jim Collins

Chairman and CEO, Insight Capital Research & Management, Inc.

Jim Collins is a master at momentum investing. His quantitative system begins with thousands of stocks and isolates those with the strongest patterns of earnings growth and technical strength. His latest buy is a bet on Hexcel, a maker of composite materials.

"Hexcel (HXL NYSE) develops lightweight, high-performance reinforcement products, composite materials, and structures used in such areas as commercial and military aircraft, and space launch vehicles and satellites. Hexcel also develops fibers used in soft body armor. Demand for these products is strong due to actions by the US military in Iraq as well as purchases from police and other security and homeland defense organizations. In addition, growth in wind energy is providing a significant boost in demand for fibers used to build the blades of windmills. High oil prices and tax incentives should continue to encourage investment in wind energy and provide increasing business for these operations.

"One of the most exciting opportunities facing Hexcel is in the commercial aerospace marketplace. The market is in the early stages of a cyclical upswing, and both Boeing and Airbus have forecast double-digit growth in airplane shipments for 2005. Compounding this opportunity for Hexcel is the trend towards higher content of composites in modern aircraft. For example, prior generations of Boeing and Airbus aircraft typically had less than 10% composite content. Contrast this to new models like the Airbus A380 super-jumbo jet that will have about 22% composite content and the Boeing 7E7 with about 50% composite content. Hexcel is a supplier of composite materials to both Airbus and Boeing.

"In October, Hexcel announced financial results for their third fiscal quarter ended September. One of the highlights of the report was a more than 25% increase in commercial aerospace sales. For the quarter, Hexcel reported earnings of $0.03 per share, compared with a $0.16 loss reported in the year earlier quarter. Revenues increased 23% to $263 million. We would note that there are risks, as the timing and size of orders from the commercial and military industries can be difficult to predict and unexpected delays or cancellations of orders could have a material negative impact on the company’s financial performance. Meanwhile, after trading flat for the first quarter of 2004, the stock bottomed out in April at $6.81. Since that time, a series of strong earnings reports have driven the stock up some 140% to a new high. The issue receives an A+ rating for accumulation and distribution and has a relative strength rating of 98 out of 100."

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