HWM Stock Forecast: DCF Model Supports HWM’s Price Around $43 For 2021

Viktoria VoronchukThis HWM stock prediction article was written by Viktoriya Voronchuk – Financial Analyst intern I Know First.

Highlights:

  • HWM’s profit growth has outperformed the aerospace and defense industry by 156%.
  • Since the beginning of 2020, the company’s share has risen by 232%.
  • DCF supports a $43 HWM stock forecast for 2021.

Overview


  (Source:www.howmet.com)

Howmet Aerospace Inc. provides advanced engineered solutions for the aerospace and transportation industries. It offers jet engine components, aerospace fastening systems, and titanium structural parts for mission-critical performance and efficiency in aerospace and defense applications, as well as forged wheels for commercial transportation. The company, formerly known as Arconic Inc., is headquartered in Pittsburgh, Pennsylvania. A forward-looking forecast for HWM stock price for 2021: since the beginning of 2020, its share has risen by 232%.

The CAGR In the Global Aerospace 4.1% From 2020 To 2027: Long-Term Investment for HWM Shares

The bulk of Howmet Aerospace’s revenue comes from the aerospace sector (over 70% of its revenue). Aerospace includes the manufacture, sale, and service of commercial aircraft. Defense supports the country’s need for military weapons and systems designed to operate on land, sea, and air. The aerospace market plummeted due to the COVID-19 crisis, causing airlines to cancel or postpone their orders. Parts and component suppliers were the first to be hit by the economic downturn in the sector.

The demand for HWM services is driven by the size of the global fleet and flight activity. It is difficult to predict how deep the current crisis in the aerospace industry will be. However, the figure below provides a rough indication of possible options for the future of global air traffic. The figure below shows that this market is forecast to recover after 2020. According to www.grandviewresearch.com, the global aerospace parts market’s size is estimated at $ 907.2 billion in 2019 and is expected to grow at a CAGR of 4.1% from 2020 to 2027.


(Figure 1- Source: www.rolandberger.com)

As shown above, due to the COVID-19 pandemic, air travel has dropped by about 90 percent. However, in the next decade, the aerospace industry is likely to see big shifts. The industry will soon begin to recover and grow by an average of 4.1% from 2020 to 2027. Therefore, I believe that the company’s shares are a good long-term investment.

Competition Analysis: HWM’s Profit Growth Has Outperformed The Industry By 156%

Howmet Aerospace and RPM International, Quanta Services are large-cap construction companies. How attractive are HWM’s shares compared to those of competitors? For that, we should compare Howmet Aerospace with competitors based on their earnings, valuation, profitability, and beta as a measure of risk.

Even though the earnings per share of HWM are less than for the competitors, its revenue is greater by 16% than of Quanta Services and is greater by 150% than of RPM International. Also the Howmet’s net income is greater than that of its competitors – 17% and 54% respectively. It is a good sign for an HWM’s profitability. Companies producing consistent and increasing net income over time are very favored by stockholders.


(Figure 2 – Valuation and earning of HWM and Competitors 2020: Source: www.marketbeat.com)

For now, let’s see how the beta is. Quanta Services stock price is 18% more volatile than the S&P 500. As for RPM International, the stock price is 12% more volatile than the S&P 500. HWM has a beta of 1.92, which suggests that its share price is 92% more volatile than the S&P 500. A beta above 1.0 indicates that a stock’s price is theoretically more volatile than the market price. This indicates that adding HPW stocks to the portfolio will increase the portfolio’s risk in terms of volatility which is expected to be compensated by higher return.

It is important to understand the whole picture of the market, as shown below. According to figure 3, HWM’s earnings growth over the past year is 79.8% higher than the 5-year average. Over the past year, HWM’s profit growth has outperformed the aerospace and defense industry by 156%.


(Figure 3 – Past 5 Years Annual Earnings Growth and Analyst Future Growth Forecasts of Howmet Aerospace and Competitors 2020: Source: www.simplywall.st)

It can be concluded that Howmet Aerospace performs well compared to its competitors in terms of net income, revenue, and annual profit growth. Over the past year, HWM’s profit growth has outperformed the aerospace and defense industry by 156%. This allows me to stay in a buying position for HPW.

HWM Financial Overview: Stock Is Up More Than 232% From April 2020

April 1, 2020, Arconic Inc. completed its business division into two independent public companies: Howmet Aerospace Inc. (new name Arconic Inc.) and Arconic Corporation. After that, as shown in the figure below, the company’s stock surged. HWM is up more than 232% from April 2020.


 (Figure 4 – Source: www.tradingview.com)

It is vital to understand the company’s ROE, ROI, and ROA indicators. As can be seen, ROE, ROI, and ROA show a downward trend for 2020. So, yes, investors must be careful with HWM’s shares. The first thing to remember is the impact of COVID-19 on the industry. The year-over-year decline was due to significant disruptions in the commercial aerospace and commercial transportation markets caused by the declining production of COVID-19, resulting in unfavorable volumes and product mix, partially offset by growth in the defense aerospace and industrial gas sectors.


(Figure 5 – Source: www.macrotrends.net)

Let’s take a glance at the future growth forecast. According to figure 6, HWM’s earnings are forecasted to grow faster than the US market by 3%. Earnings are expected to grow significantly over the next 3 years.

(Figure 6 – Analyst Future Growth Forecasts of Howmet Aerospace and Competitors 2020: Source: www.simplywall.st)

Altogether I can conclude that the aerospace industry is susceptible to changes in the economy. This sector’s economic vulnerability means that companies in it must be resilient to survive these ups and downs. Above all, it means Howmet Aerospace has a strong financial position that allows having the flexibility it needs to support its operations in difficult times and thrive in a healthy economic environment. 

DCF Supports $ 43 HWM Stock Forecast For 2021

The forecast is based on average data from previous years, the direction of the company’s policy, and the specifics of the development of this sector of the economy for the coming years. The increase of D&A for the next years was primarily estimated due to future capital projects placed into service. An increase in net working capital indicates that the company has decreased current liabilities by $2,557 mil. on June 30, 2020, from December 31, 2019. Approved capital expenditures for new or expanded facilities for environmental control are $14 million for 2020 and estimated expenditures for such purposes are $15 million for 2021.  Future cash flows are projected based on historical data combined with a forecast for the next 4 years.

 The DCF analysis results show that HWM’s stock target price should be around $43.  This projected share price makes a $15 more difference from the current share price.


 
(Figure 7 – DCF model of HWM’s shares)

Conclusion:

I take the buy-side on HWM’s stock because stock holds buy signals from both short and long-term moving averages giving a positive forecast. HWM shares are up more than 232% since the beginning of 2020. HWM’s earnings are forecast to grow faster than the US market by 3%. Earnings are expected to grow significantly over the next 3 years. The company has increased net income and revenue and is seen very favorably by stockholders. The global aerospace market will begin to recover soon and grow at a CAGR of 4.1% from 2020 to 2027.  Therefore, I consider it a good choice at these current levels, and according to the DCF analysis results, HWM’s stock target price should be $15 more and will be around $43.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the HWM stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success With HWM Stock Prediction

I Know First has been forward-looking with its HWM in the past. On November 10, 2020, and November 15, 2020, the I Know First algorithm issued a forward-looking forecast for HWM stock price and recommended HWM as one of the best consumer stocks to buy. The AI-driven Howmet Aerospace stock prediction was successful both on a 2 weeks horizon and 1-month horizon resulting in more than a 12.53% and 20.48% gain since the forecast date. See the charts below.

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Please note-for trading decisions use the most recent forecast.