Howmet Aerospace dip buy as turbine supplier trades 30% off highs

Howmet Aerospace is a buy after the stock fell 30% from its August high, momentum trader Steve Grasso wrote in a CNBC Pro column.

The Pittsburgh-based company makes turbine blades, fasteners, and other components that go inside jet engines and power turbines. It supplies GE Aerospace and holds a leading position in the market for high-performance turbine components. The stock has been hammered by concerns about new competition, but Grasso argues the fears are overblown and the business is getting stronger, not weaker.

Howmet’s third-quarter results support the case. Revenue jumped 29% from a year earlier to $2.7 billion, including 25% organic growth. Adjusted earnings per share climbed 54% to $1.46, beating Wall Street’s estimate of $1.37. Adjusted EBITDA margin reached 32.5%. Those are not the numbers of a company whose business is being disrupted, as CNBC’s industrials coverage notes.

The guidance raise

Management raised fourth-quarter earnings-per-share guidance to a range of $1.49 to $1.51, compared with the consensus estimate of $1.42 from analysts. The company also raised full-year EPS guidance to a range of $5.45 to $5.51. Grasso made the point directly: companies with a broken competitive position do not raise guidance for the quarter and the full year in the same release.

The guidance raise is the strongest signal in the report. Management has visibility into the business that outside analysts do not, and the decision to raise both the quarterly and annual outlooks indicates that the order book is strong and the production pipeline is healthy. Howmet’s customers are aerospace manufacturers who place long-term contracts for engine components, and the guidance raise suggests those contracts are holding up despite the competitive concerns that have weighed on the stock.

The buyback authorization adds to the signal. Howmet has repurchased $1.1 billion in stock so far this year, and the company authorized an increase to its share-purchase program to $5.4 billion, up from $5 billion. A company that is buying back its own stock at an accelerated pace is signaling that management believes the shares are undervalued. The buyback also provides direct support for the stock price, because the company is a consistent buyer in the market.

The competitive threat

The stock’s 30% decline from its August high is driven by two competitive concerns. First, GE Aerospace is acquiring a rival turbine-parts supplier, which could reduce Howmet’s share of GE’s component sourcing over time. Second, SpaceX plans to start making its own turbine blades, which could reduce Howmet’s addressable market in the space launch segment.

Grasso’s counterargument is that both threats are years away from meaningfully affecting Howmet’s business. The GE Aerospace acquisition needs to close, the acquired company needs to be integrated, and the combined entity needs to demonstrate that it can produce turbine components at the quality and cost that Howmet achieves. That process takes years, and during those years, Howmet continues to supply GE and generate revenue from the relationship.

The SpaceX threat is even more distant. SpaceX is focused on rocket manufacturing and launch operations, and developing internal turbine blade manufacturing capability is a different engineering challenge. Even if SpaceX succeeds in making its own blades, the volume is small relative to Howmet’s aerospace business, and the timeline is uncertain. The market is pricing in a threat that may not materialize at scale for years, if ever.

Analysts on Wall Street agree with Grasso’s assessment. The consensus price target implies a rebound of more than 35% over the next 12 months, according to the CNBC column. The gap between the current stock price and the analyst target is the market’s way of saying that the competitive fears are overdone, and the bounce would close that gap if the business continues to perform.

The aerospace cycle

Howmet’s results are part of a broader aerospace cycle that is driving demand for engine components. The commercial aviation industry is in a multi-year recovery from the pandemic, with airlines ordering new aircraft and flying more miles. Boeing and Airbus are working through backlogs that stretch years into the future, and the engines that go on those aircraft require components from Howmet and other suppliers.

The cycle is a tailwind for Howmet because engine components are not interchangeable. A turbine blade that goes into a GE engine is designed and certified for that specific engine, and switching suppliers requires recertification that takes years. Howmet’s installed base of components in flying engines generates a steady stream of replacement business, and the new engines being built for the aircraft backlog generate incremental demand. The competitive threats are real, but they are competing for future business, not for the installed base that Howmet already supplies.

The power turbine business is a secondary growth driver. Howmet’s components go into gas turbines used for power generation, and the demand for electricity from data centers is driving investment in new turbine capacity. The AI infrastructure build that is driving demand for powered land and data center capacity is also driving demand for the turbines that generate the power, and Howmet supplies components for those turbines. The connection between AI and turbine components is not obvious, but it is real, and it adds a growth dimension to the business that the market may not be fully pricing.

What I think

The dip buy is a good trade. Howmet is growing revenue 29%, raising guidance, expanding margins, and buying back stock. The stock is down 30% from its high on competitive concerns that are years away from affecting the business. The gap between the current price and the analyst target is 35%, and the business is getting better, not worse. Those are the conditions for a value trade, and the momentum is turning as the sell-off exhausts itself.

The competitive threat from GE Aerospace’s acquisition is the one to take seriously. GE is Howmet’s largest customer, and if GE decides to internalize turbine component manufacturing through the acquisition, Howmet’s revenue base shrinks. The counterargument is that GE has been Howmet’s customer for decades, the components are certified for specific engines, and switching costs are enormous. But GE is making the acquisition for a reason, and the reason is to gain more control over its supply chain. Over a five-year horizon, the threat is real, and investors buying the stock now should be aware that the competitive landscape is shifting.

The SpaceX threat is less serious. SpaceX is a rocket company, not a jet engine company, and the turbine blades used in rocket engines are different from those used in commercial jet engines. If SpaceX develops internal manufacturing capability, it serves SpaceX’s own needs and does not compete with Howmet for aerospace business. The market is overpricing this threat, and Grasso is right to dismiss it.

The buyback is the most bullish signal. Howmet is not just authorizing a buyback; it is executing on it, having repurchased $1.1 billion so far this year. The company is putting its cash behind its conviction that the stock is undervalued, and that is a stronger signal than any analyst recommendation. A company that is buying its own stock at a 30% discount to its recent high is saying that it believes the business is worth more than the market is currently pricing, and the buyback provides direct support for the share price.

The aerospace cycle is the tailwind that makes the trade work even if the competitive concerns are not fully resolved. The aircraft backlog is years long, the engine components are long-lived and need replacement, and the power turbine business is growing with data center demand. Howmet is positioned in a growing market with a leading position and high switching costs. The stock is pricing in a disrupted business, and the actual business is growing. That gap is the opportunity, and Grasso’s call is the right way to express it.