Howmet Aerospace: GARP Fundamentals, But Bearish Near-Term Chart

The Aerospace & Defense industry has outperformed the S&P 500 by nearly 20 percentage points in the last year, but there has been recent relative weakness as growth has returned to favor. Still, a popular long-term thesis is that ongoing investment and reshoring should help producers of defense equipment and capital goods.

One under-the-radar industry stock is up even more YoY than the in-vogue ETFs. But are shares of Howmet too high? Or can the bulls keep their fingers on the buy trigger? Let’s check it out.

Aerospace & Defense Drops Back On A Relative Basis

According to Bank of America Global Research, Howmet Aerospace (NYSE:HWM) manufactures components for jet engines, fasteners, and titanium structures for aerospace applications and forged aluminum wheels or heavy trucks within its four primary business segments – Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. The company separated from Arconic Corp in April 2020 and has since been focused on product quality, long-term agreements, and improving free cash flow.

The $16.8 billion market cap Aerospace & Defense industry company within the Industrials sector trades at a high 38.8 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.4% dividend yield, according to The Wall Street Journal.

Back in October, HWM reported in-line EPS but missed on revenue estimates. Shares generally traded higher before and after earnings, though. Some downbeat news came two weeks later when it was revealed that Elliott Management reduced its stake in the Industrials sector stock.

On valuation, analysts at BofA see earnings having risen massively in 2022 by nearly 40%. Per-share profits are seen as climbing another 26% this year and continue at a high growth rate through 2024. The Bloomberg consensus EPS forecast is slightly less optimistic compared to what BofA expects. Dividends, meanwhile, are expected to rise 60% this year, but still at a low yield.

Both HWM’s operating and GAAP P/Es are not all that extreme given the growth projection, and the firm’s EV/EBITDA multiple is only about 20% higher than that of the broad market. Finally, free cash flow is positive, but its yield is not particularly high. Overall, with a forward operating PEG ratio of just 1.09 – below the sector average of 1.55 – I see a GARP case on Howmet.

Howmet: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data from Wall Street Horizon shows a confirmed Q4 2022 earnings date of Tuesday, February 14 before market open with a conference call later that morning, You can listen live here. The calendar is light on volatility catalysts aside from the earnings date.

Corporate Event Calendar

The Technical Take

HWM has beaten both its sector ETF and the S&P 500 in the last year. Shares are higher by 15.5% but have recently dipped back below an uptrend line. Shares are on false breakout watch, with support way down at a horizontal zone between $27 and $30.

Notice in the chart below that shares are still featuring strong RSI momentum, but volume on the latest run-up has been sagging. With a rising 200-day moving average, the long-term trend is indeed higher, but there are a few bearish clues seen in the chart lately. If shares fall below, say, $38, more significant downside is possible.

HWM: Bearish False Breakout Watch

The Bottom Line

I like the GARP case on Howmet Aerospace, but the chart warrants near-term caution given a possible bearish false breakout. I would look to buy the stock in the mid-$30s, with a stop under $27.