Margin Execution Improves But Balanced Risk Reward; Remain EW

Research evidence excerpt

Margin Execution Improves But Balanced Risk Reward; Remain EW

UpdateMdownside risks should aircraft production be constrained by issues in other areas of

the aircraft supply chain. Accordingly, we see balanced risk-reward and remain

Equal-weight.

Hexcel Looks Ready for the OEM Production Ramp

Hexcel appears to have largely completed the manufacturing investments required

to support higher commercial aerospace OEM production. Over the past several

years, Hexcel has invested in expanding PAN (polyacrylonitrile) carbon fiber capacity,

including the Decatur facility, positioning the company to support higher OEM

production rates. Going forward, management is guiding to <$100mn capex in 2026,

with investments focused primarily on labor, inventory and restarting idle assets

rather than building significant new manufacturing capacity. The quarter provides

evidence that the existing footprint can support higher production. Commercial

Aerospace sales increased ~18% YoY, led by the A350 and 787 aircraft programs,

while operating margins expanded, demonstrating the earnings leverage embedded

in Hexcel's existing manufacturing footprint. This suggests Hexcel is well-positioned

to meet demand from its customers as OEMs advance to higher production rates.

Future upside is now driven less by Hexcel's manufacturing capacity and more by the

ability of Airbus, Boeing, and the broader supply chain to successfully increase

aircraft production, in our view.

OEM Supply Chain Remains a Risk

While Boeing and Airbus (covered by Ross Law) continue to guide to increased

production rates, which would provide upside to HXL, the supply chain remains a

gating item to realize a significant production ramp, in our view. On the A350, HXL's