Over the last six months, Hexcel’s shares have sunk to $62.46, producing a disappointing 7.2% loss - a stark contrast to the S&P 500’s 5.5% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Hexcel, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Hexcel Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Hexcel. Here are three reasons why we avoid HXL and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Hexcel’s demand was weak over the last five years as its sales fell at a 1.8% annual rate. This wasn’t a great result and is a sign of poor business quality. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Hexcel, its EPS declined by 5.6% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Hexcel’s margin dropped by 8.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Hexcel’s free cash flow margin for the trailing 12 months was 9.1%.
Final Judgment
Hexcel falls short of our quality standards. After the recent drawdown, the stock trades at 28× forward P/E (or $62.46 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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