Space Exploration’s Return to Glory: How to Profit
Like many kids growing up during the 1960s, I was obsessed with the American space program. I avidly followed the Mercury, Gemini and Apollo programs, revered the astronauts, and launched my own model rockets. Pictures of space capsules adorned by bedroom wall, my schoolbooks, and my lunchbox.
Then during the dreary 1970s, as NASA’s budget was decimated, all of this glory just faded away.
Will today’s billionaire visionaries return humankind to the heady days of space exploration? It’s sure looking that way. Wealthy entrepreneurs aren’t waiting for Uncle Sam to rekindle space voyages; they’re launching new space ventures and making money from them.
Below, I examine the best investment play on the new golden age of space. You’ve probably never heard of this company, but aerospace would be grounded without it.
This week, Elon Musk’s SpaceX successfully launched a Falcon 9 rocket carrying a commercial EchoStar 23 communications satellite from an historic launch pad at NASA’s Kennedy Space Center in Florida. It was the first time a commercial satellite launch occurred at the pad that once served as the sending-off spot for Apollo moon voyages.
Also this week, the U.S. Air Force announced that it had awarded SpaceX a $96.5 million contract to support the launch of a next generation global positioning system satellite called GPS III.
Private company SpaceX was founded by Tesla (NSDQ: TSLA) CEO Elon Musk in 2002, with the goal of reviving (and profiting from) space exploration. He’s not the only guy with deep pockets whose eyes are on the stars.
This month, Amazon (NSDQ: AMZN) founder and CEO Jeff Bezos — a self-proclaimed “space geek” — announced that his fledgling space company Blue Origins had signed up its first customer. The satellite television provider Eutelsat will put one of its satellites atop Blue Origin’s New Glenn orbital rocket for delivery in space. The launch is scheduled for around 2021.
All of these endeavors have one vital substance in common: carbon composites. Without these ultra-tough materials, the galactic ambitions of Musk and Bezos would grind to a halt. In fact, the entire aerospace industry couldn’t function.
The first company on the moon…
There’s one company that dominates the manufacture of carbon composites: Hexcel (NYSE: HXL). Think of Hexcel as the ultimate picks-and-shovels play.
Burgeoning demand for super-sturdy composites from aerospace companies is defying today’s global economic uncertainty, positioning materials manufacturer Hexcel for market-beating growth.
It’s worth noting that the first lunar footprints didn’t actually come from Neil Armstrong. That distinction belongs to Hexcel.
A pioneer in the manufacture of high-performance materials, Hexcel made the composite footpads on the Apollo 11 lunar module, as well as similar components for the Mercury and Gemini space programs. Hexcel continues to dominate the composites market and is riding the accelerating shift toward these materials in a wide range of industries. SpaceX and Blue Origins are Hexcel customers.
Hexcel is among the most exciting investment stories of 2017 and beyond — and I’m not just making that assertion because I’m a space enthusiast like Musk and Bezos. I know a great growth stock when I see one.
Composites are polymer materials reinforced with carbon fiber, forming a strengthened combination that’s light, flexible and durable. The next decade will see an explosion in the use of composite materials, in a variety of applications that include cars, trains, planes, satellites, boats, bicycles, housing materials, sporting goods, and wind energy.
Hexcel is enjoying strong tailwinds. U.S. demand for polymer composites rose roughly 15% year-over-year to $10.2 billion in 2016, with similar growth forecast for this year.
The continual push for greater fuel efficiency is boosting demand for lightweight composites to replace metal parts in automotive manufacture. Meanwhile, development banks are ramping up capital expenditures in wind energy projects across the world.
The purest play on the world’s growing thirst for composites is Stamford, Conn.-based Hexcel, the leading U.S.-producer of carbon fiber and by far the number one producer of aerospace composite materials.
With a market cap of $4.93 billion, Hexcel maintains three divisions: commercial aerospace, space and defense, and industrial. As demand increases for these sophisticated materials for a wide variety of uses, many manufacturers lack the engineering experience and skills to move away from metal-based assembly lines, forcing them to turn to Hexcel.
A manufacturing revolution…
Hexcel is a leading supplier of composites for all markets but the company’s greatest opportunities for growth stem from aerospace, where the use of composites is the most significant manufacturing watershed since aluminum replaced wood in the 1920s.
Hexcel is the chief composite supplier for aerospace giant Boeing (NYSE: BA), which has bet the farm on its Dreamliner 787, a composite-built passenger aircraft.
Composites offer dramatic performance benefits for aircraft, including reduced weight, improved fuel burn, and better resistance against corrosion and damage.
Hexcel’s materials also are found in General Electric (NYSE: GE) engines and Lockheed Martin (NYSE: LMT) fighter jets, products that are enjoying booming demand as the aerospace and defense industries surge. President Trump’s promised defense build-up will prove a boon for Hexcel.
The average analyst expectation is that Hexcel’s year-over-year earnings growth will reach 5.4% this year, 15.4% next year, and 10% over the next five years on an annualized basis.
Hexcel sports a trailing price-to-earnings (P/E) ratio of about 20, roughly in line with the trailing P/E for its sector of industrial goods, making this composite king a good bet for investors seeking recession-resistant, long-term capital appreciation amid an increasingly risky investment climate.
Got a question or comment? Send me a letter: email@example.com — John Persinos
The scientific geniuses at MIT…
America couldn’t have landed on the moon without considerable scientific prowess, especially from the brilliant minds at institutions such as the Massachusetts Institute of Technology.
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