This is one of the January 2025 stock picks of StockStory , a fintech investing company seeking to identify long-term ideas that beat the market using an AI-driven approach. Howmet Aerospace (HWM) is a powerhouse supplier to the makers of planes and trucks. Its differentiated vertical integration approach has led to advantages in innovation and reliability, allowing the company to command top market share and to exhibit years of profitable growth. While the market is starting to recognize its ever-improving business quality and mission-critical role in aerospace and commercial transportation, we think that two exciting aspects of the story are still somewhat underappreciated. First, the company is at the cutting edge of automating its manufacturing plants, using advanced robots and AI to further its already-large lead. Second, Howmet will benefit from the rapidly rising electricity demands of datacenters that power the AI revolution. This is due to the company’s role as the top blade supplier to industrial gas turbine (IGT) manufacturers. Taken together, dominance of its core aerospace/transport markets and exciting secular tailwinds mean Howmet rises to the level of a StockStory Monthly Pick. Industry Overview Let’s start by understanding the core market in which Howmet plays. OEMs (Original Equipment Manufacturers) produce planes and trucks for the aerospace, defense, and commercial transportation markets. Below are the dominant OEMs in each vertical along with their key products. These OEMs do not design and manufacture everything that goes into a plane or truck, so they rely on suppliers like Howmet for many parts and components, prioritizing suppliers who prove both innovative and reliable. Cost is important for commoditized inputs, but focus has more recently shifted to suppliers that enhance fuel efficiency — a priority because fuel accounts for 20-30% of airline operating expenses, for example, and emissions regulations are tightening globally. Suppliers of jet engine parts, fasteners, landing gear, and truck wheel/brake systems achieve fuel efficiency with lighter, more durable components that withstand ever higher temperatures and pressure over many years. Sticky, long-term relationships with OEMs are the rewards for suppliers that can invest in R & D to design the most fuel-efficient solutions and can reliably deliver these solutions when needed. High capital requirements, stringent certifications, and long product cycles create significant barriers to entry for suppliers in aerospace, defense, and commercial vehicle industries. You can’t just write some code or create an online marketplace and break into these industries. These high barriers favor incumbents, positioning market leaders for continued success so long as they can keep customers happy. What Is Howmet Aerospace? Howmet Aerospace provides engineered solutions for the aerospace and transportation industries. Practically speaking, the company designs and manufactures complex, mission-critical components of aircraft frames, jet engines, and commercial trucks. The company is dominant in the market for turbine blades and vanes in the high-temperature sections of jet engines and gas turbines, for example. Howmet is also a leading provider of fasteners—everything from simple bolts to complex fastening systems — that are found from nose to tail in commercial and defense aircraft as well as in commercial vehicles. The company’s forged wheels, which are lightweight and corrosion resistant, serve the largest OEMs in commercial trucking. Although the company’s portfolio may be broad, Howmet’s guiding light is providing products that facilitate more fuel-efficient aircraft and commercial trucks, which can result in significant cost savings over the useful life. The company does this by pushing the limits on lighter-weight components that can withstand more heat and pressure over many years of operation. Below are two ways to break down the company’s revenue: Howmet Aerospace traces its origins back to Alcoa, a company with two different businesses. In November 2016, Alcoa therefore split into two independent, publicly-traded companies. Post separation, Alcoa focused on the production of raw aluminum and bauxite while Arconic focused on engineered products and advanced manufacturing for aerospace, automotive, and other industries. In April 2020, there was yet another separation, with Arconic splitting into Arconic and Howmet Aerospace. The former kept products like rolled products (metal sheets), aluminum extrusions (metal frames and rails), and building/construction systems while the latter is the Howmet we know today. Competitive Landscape Competition isn’t the top concern for Howmet thanks to its strong market position and unique dynamics of its industry. In its bread-and-butter Engine Products segment, for example, Howmet holds over 60% market share and has increased this share each of the last five years, according to management. The company also leads in most of its other principal markets. Customer relationships in aerospace and commercial transportation are sticky, supported by Howmet’s history of reliability and innovation. The industry’s long product cycles—spanning years or even a decade to design, test, certify, and sell—further protect established leaders like Howmet from competitive shifts. However, it’s still important to understand its key competitors in aerospace and commercial trucking, outlined below. Why We Love Howmet Aerospace Howmet’s business quality is unmatched for three reasons: the state of air travel, the company’s top-tier economic moat, and its elite financial performance. Industry Tailwinds From 2010 to early 2020, global air traffic grew steadily at a mid-single-digit annual percentage, driven by a growing middle class prioritizing experiences like travel over material goods. The COVID-19 pandemic abruptly disrupted this trend, and while there has been recovery from that trough, air traffic remains below the pre-pandemic trajectory. This pent-up demand suggests global air travel growth could exceed historical levels in the coming years as we ‘play catch up’. On the supply side, increased travel demand, supply chain disruptions, labor shortages, and inflation have created an 8.5-year backlog for commercial aircraft and aero engines. This provides Howmet with strong multi-year visibility for its business supplying OEMs. In short, more miles flown globally drives higher demand for new planes, benefiting Howmet as a key aerospace OEM supplier. If new aircraft production slows, as seen with Boeing’s recent issues, it can still favor Howmet, as older planes require more maintenance and repairs. This boosts Howmet’s aftermarket sales, which are typically more recurring and higher margin than OEM sales. We see current industry dynamics as a win-win for Howmet. Strong Economic Moat At StockStory, we value combining industry tailwinds with company-specific advantages. Howmet’s vertical integration and dominant market share create a virtuous cycle that continually strengthens its competitive moat. Vertical integration means that Howmet controls multiple stages of production, from design and raw materials to finished components. This allows the company to retain significant proprietary technology in its processes because Howmet builds things like furnaces and tooling in house. It also means more control over getting components and parts to customers in a timely, reliable manner since there are fewer parties involved from start to finish. For example, in airfoil casting—to produce a critical jet engine component—Howmet manages every step from mold assembly to high-speed CNC machining to coatings. This integration ensures proprietary technology stays within Howmet’s walls. It also ensures faster delivery and greater reliability by reducing dependency on intermediaries. This strategy underpins Howmet’s over 60% market share in Engine Products and leadership in most of its other markets. High market share then drives economies of scale, higher profits, and profit reinvestment into innovation and process improvements, further solidifying Howmets’ lead. Rinse and repeat. Financial Performance The wanderlust of global consumers and a differentiated vertical integration strategy make for great stories, but what about the numbers? Fortunately, the company’s financial performance shows an impressive track record when it comes to profitable growth. We won’t narrate all the numbers because we’ve presented a snapshot below, but we’re most impressed with how Howmet turned an already impressive 14% annualized revenue growth from 2021 to 2024 into 39% annualized EPS and 55% annualized free cash flow growth over the same post-COVID timeframe. This was done through increasing operating efficiency that led to higher margins and robust cash flow generation that was partly directed towards share buybacks. Still, 2024 revenue was still only 5% above 2019 (pre-COVID). This means that as global travel continues to recover to the historical trendline and as commercial aircraft backlogs ease, the ceiling for topline and profits is much higher than current levels. Why Is Now The Right Time to Buy Howmet? It’s almost always a good time to invest in a business that boasts unmatched competitive advantages and strong long-term financial performance. Our research on hundreds of stocks shows that when you identify a high-quality company, don’t be too cute about where you get in. Just get in, hold, and be patient. With that said, we like three timely dynamics. A mix shift towards aftermarket sales is good for revenue AND for margins Not enough attention is being given to Howmet’s industrial gas turbine (IGT) business that will benefit from datacenter energy demand The company is quietly becoming an automation and AI powerhouse Revenue Mix Towards Replacement / Space Parts Howmet’s growing aftermarket (replacements and spares) mix is a compelling reason to buy now. Before the pandemic, aftermarket components accounted for 10% of revenue. By 2024, as supply chain disruptions delayed new aircraft deliveries, operators relied on aging fleets, pushing Howmet’s aftermarket mix to 17%. With an 8.5-year backlog for commercial aircraft and engines, the aftermarket mix is projected to exceed 20% within a year or two and increase further thereafter. This shift increases the quality of revenue and boosts profits, as aftermarket parts have more predictable demand due to their role in regular, sometimes statutorily-mandated maintenance. Aftermarket parts also carry higher margins due to their critical, time-sensitive nature and lack of discounts when compared to OEM parts meant to lock in customers to a razor-razor blade model (where the initial cost of a system or component is low but the customer is locked into buying replacement parts from a single supplier). This shift alone could drive several points of gross margin increase over a multi-year period, which isn’t bad for a company whose gross margin only increased by one percentage point between 2019 and 2022. It also provides support for a premium valuation multiple, as the market finds aftermarket revenue highly desirable. Industrial Gas Turbines (IGTs) While Howmet is widely regarded as a leader in aerospace, an often overlooked but increasingly vital part of the business is its role as the single largest supplier of blades for industrial gas turbines (IGTs). General Electric, Siemens, Mitsubishi Heavy, and Ansaldo Energia are key manufacturers of IGTs, and each company buys some or all of its turbine blades from Howmet. Great, but why are IGTs exciting? IGTs are critical for powering datacenters, whose electricity demands are soaring due to AI’s proliferation. For example, an AI query consumes roughly 10x the electricity of a Google search. In early January 2025, Microsoft boldly announced that the company “is on track to invest approximately $80 billion to build out AI-enabled datacenters to train AI models and deploy AI and cloud-based applications” this year alone. So not only will the power needs of existing datacenters explode, but the number of datacenters globally will increase meaningfully too: “Typical server racks range from 5-10 kW (kilowatts of power), but AI-intensive racks can exceed 20 kW of power required, with high-performance setups reaching 50 kW. Additionally, datacenter capacity is projected to grow 15-20% annually over the next five years due to AI, cloud migration, and edge computing.” – StockStory November 2024 Monthly Pick report AI a tide that will lift the boats of most energy sources to datacenters, but among the various energy sources, IGTs are well positioned due to the limitations faced by competing energy sources. We know what nuclear capacity will look like in the next few years by examining permits for new facilities. Other than the repurposing and refurbishment of the Three Mile Island facility, new permitting in nuclear power is limited. As for renewable energy sources, they face headwinds once Trump takes office. The policy shifts of his administration heavily favor fossil fuels over renewables and are likely to negatively impact the growth of wind and solar. Finally, there is the practical consideration of reliability–datacenters need uninterrupted power, but there can be stretches of little wind or sun in certain geographies. Taken together, these factors will provide IGTs with openings that could further spark demand. “It’s the most expensive energy there is. It’s many, many times more expensive than clean natural gas so we’re going to try and have a policy where no windmills are being built” – Donald Trump, January 7th, 2025 at a press conference at his Florida resort Although Howmet hasn’t disclosed IGT-specific financials, we estimate it nearing 10%of total revenue. The Engine Products segment, which includes IGTs, saw 21% revenue growth in 2023 followed by another 14% growth through the first nine months of 2024, signaling continued strong demand for these industrial turbines. Industrial Automation and AI Industrial automation and AI are transformative, long-lasting themes, and Howmet is a beneficiary of both. This makes the stock a compelling investment, as the market hasn’t fully recognized Howmet’s lead in using factory robots and AI to improve its manufacturing processes. Howmet began automating its plants as early as 2007, initially using stationary robots for simple tasks like dipping wax molds in ceramic sludge. Today, it employs mobile robots that can move about a shop floor and perform multiple steps with better throughput, lower error rates, and reduced operating costs (although there are high upfront capital investments) compared to human labor. Every part, in-process component, and finished product in a Howmet plant has a barcode attached to it. When combined with the sensors in Howmet’s robots and other equipment, the company can track every move about the shop floor and optimize not only how individual robots navigate processes but how they interact with each other and with the things they handle. Saving 20 seconds here and a minute there over and over can result in differentiated time to market. Additionally, Howmet was an early adopter of X-ray film to scan for defects in parts decades ago. These X-rays were then manually reviewed by plant employees. Today, the company has advanced to employing AI and defect recognition software to identify flaws in parts and components continuously throughout the manufacturing process. This reduces waste and ensures a more reliable product. Despite a lead versus peers in automation and AI, we estimate that Howmet is only about halfway through its factory digitization journey. The next few years should see the company harvesting previous investments to drive higher margins. Howmet will continue to invest in further digitization, with AI-assisted design and simulation (for faster time to market), 3D printing for additive manufacturing (not higher performance), and the development of lightweight metal alloys (to reduce weight and drag) as likely top priorities. “I really believe the application of automation into aerospace is vital for the industry because everything that requires an artisanal skill introduces that human variability into the production process. For us to drive quality and repeatable performance, we do have to automate…whether it’s the molding machines, the application temperature, the waxes, the casting process itself or the shell process, doing it all by robot control.” – CEO John Plant, May 2024 What Does the Future Hold? Howmet will continue to be a quality compounder, starting with 10% annualized revenue growth over the next five years. This will be driven by strong commercial aerospace demand as aftermarket replacement parts stay in high demand due to the aging fleet and bottlenecks to producing new aircraft. IGT proliferation and demand from a commercial transportation industry aiming to meet important environmental standards (such as the EPA’s Low-NOx Rules) by 2027 will also help. As it has done, Howmet will turn this revenue growth into even higher profit, EPS, and cash flow growth. Economies of scale and continued cost optimization through automation and other efficiencies will be the key drivers there. Note that higher profit margins will bring about free cash flow in 2028 that is nearly 3x the levels achieved in 2023. This will allow Howmet to be one of the rare companies that can almost do it all with regards to capital allocation—organic investment, paying a dividend, and share buybacks are all on the table, giving shareholders multiple ways to win. As the company’s aftermarket replacement part revenue grows as a percentage of revenue, Howmet should at least maintain its current mid-30x P/E multiple. Over three years, we project the stock will close in on $190 per share, good for a 17-18% annualized return that will likely outperform the market. We think there’s a probable bull case where Howmet’s multiple actually rises over time as its aftermarket mix ramps and as the AI tailwind becomes more defined. Just look at Heico (NYSE:HEI), the poster child for a successful aerospace aftermarket business, which currently sports a 53x P/E multiple and a five-year average multiple of 55x. Even a minor increase in the multiple could push annual returns over 20%. Why Do We Believe In Company Management? Howmet Aerospace is led by CEO John C. Plant, who led predecessor company Arconic from February 2019 through 2020. When Arconic was split into Arconic and Howmet Aerospace in April of 2020, Plant and Tolga Oal became co-CEOs of Howmet Aerospace until Oal’s ultimate termination in October 2021. At that point, Plant became sole CEO. April 2020 was quite a time to take the reins of an aerospace supplier. The COVID-19 pandemic was beginning to wreak havoc on global travel and global supply chains, but Plant managed to navigate that unprecedented multi-year headwind and set Howmet up to thrive thereafter. Under his watch from April 2020 to today, the company’s stock price has increased 10x. We like how Plant and other top executives are compensated as well, with only 10-20% (depending on the executive and that year’s financial performance) of pay from a fixed base salary. The other 80-90% is based on hitting a variety of financial targets such as adjusted EBITDA, free cash flow, and the achievement of strategic goals that change over time. For example, one year’s strategic goals may include renegotiating union contracts with no disruption to operations while another year may be to reduce debt levels below a certain threshold. Lastly, we like that Plant and other top executives are aligned with shareholders. Plant in particular owns over 3.6 million common shares of Howmet (this is not counting options and other equity awards), worth over $400 million at the current price. The best way for Plant to increase his and his family’s net worth is to drive stock price performance (which he’s done very successfully thus far). What Are The Key Risks? We see three salient risks with an investment in Howmet Aerospace: Customer concentration Raw material inflation Valuation Customer Concentration In 2023, General Electric and RTX represented approximately 12% and 9% of Howmet’s total third-party revenue, respectively. While the company hasn’t divulged its exposure to Boeing recently, we have reason to believe that it is a top 5 customer as well, presenting a mid to high-single-digit percentage of revenue. Should these customers decide to diminish their relationship with Howmet or should they run into difficulty that reduces their demand for Howmet’s products, topline headwinds could result. We take comfort in the fact that Howmet’s relationships with its customers tend to be multi-year in nature. Unless there is something truly wrong with Howmet’s products or dependability in providing these products, customers don’t just walk. It is not easy to find suppliers in aerospace and commercial transportation that can match Howmet’s value proposition of cutting edge technology that is both reliable and that can help OEMs reduce the carbon footprint of their finished aircraft and commercial vehicles. Raw Material Inflation Below is a list of the raw materials that go into Howmet’s finished products, grouped by segment. We know that Howmet maintains annual or long-term contracts for a majority of its raw materials. However, the company must also purchase some raw materials via spot purchases. This means that for the raw materials not tied to long-term contracts, Howmet is at the mercy of prevailing market prices. Should the prices of raw materials that Howmet must purchase on the spot market rise meaningfully or unexpectedly, the company could see swift declines in gross and operating margins. This is especially true for parts and components where the company has limited pricing power due to competition. It’s not the best consolation, but we keep in mind that raw material inflation will affect the entire industry. Howmet may see lower margins, but it’s unlikely that it will lose its market position because competitors will also face the same headwinds. As a scaled leader, Howmet may be able to weather raw material inflation storms better than peers since it has superior purchasing power. Valuation The stock is up over 100% in the last year and trades at a forward P/E ratio of 37x. This is a premium multiple if you look at the valuation without context and above the five-year average of 28x. Some good news is priced into shares. A disappointing quarter or a development that throws cold water on the market’s perception of Howmet as a quality compounder could result in the double-whammy of lower earnings estimates and de-rating. However, we think Howmet’s multiple is perfectly reasonable, and the higher the mix of aftermarket replacement parts revenue, the more deserved this multiple becomes. You can see this by looking at Howmet’s multiple compared to the multiples of three other stocks in the aerospace sector with strong aftermarket mixes: Heico (NYSE: HEI), TransDigm (NYSE:TDG), and FTAI (NASDAQ:FTAI). With regards to valuation, we also say this—StockStory’s analysis shows that when it comes to picking great stocks, business quality far outweighs entry price over the long term. In other words, a company’s fundamentals (growth, margins, free cash generation) matter much more than whether you buy it at 30x P/E, 35x, or even 45x if your holding period is years, not months. Ultimately, we’re comfortable with Howmet’s valuation because the company’s business quality is so good (and getting better). Additionally, we still think the aftermarket mix shift, exposure to IGTs, and automation/AI exposure are still somewhat underappreciated. Could the stock swing somewhat violently over the short term because of this premium multiple? Yes, but we’re confident that a long-term hold will smooth out those bumps and result in robust, market-beating returns. Who Is This Investment For? Zooming out, we stress that owning a high-quality company with the potential for attractive multi-year returns is for any investor. More specifically though, we think Howmet is for investors who may lack industrials exposure due to a portfolio levered to tech and consumer names, for example. Howmet is a quality compounder with secular tailwinds at its back, and we at StockStory think it deserves to be a roughly 5% position, in line with the average holding in a 20-stock portfolio (our recommended number to optimize diversification without diluting the return potential of big winners). Closing Thoughts We’re big fans of aerospace businesses with strong moats and Howmet is a cream-of-the-crop one. Whether you care about market share, profitable growth, or a bright future, Howmet has it all. Any further questions about Howmet? Reach out to our lead analyst Anthony Lee at anthony@stockstory.org. Disclosure: Anthony Lee and members of the StockStory team don’t have any positions in Howmet Aerospace (HWM).
