2 Great Stocks to Buy as Earnings Fall This Season

It’s always interesting to monitor stocks to buy during earnings season if the market overreacts to any negative news. With that in mind, I think Delta Airlines (NYSE:DAL) AND Hexcel Corporation (NYSE:HXL) worth a look. Both stocks have been sold off recently, and I think the market is being a little too harsh on them. Here’s why.

Delta Air Lines and Market Cyclicality

Supply and demand set prices in a free market, and that is the case in the airline industry. As such, airlines can raise prices when demand exceeds supply, but will experience profitability pressures when the latter occurs. Unfortunately, the airline industry has experienced feast and famine cycles, and airlines have historically maintained high production capacities during difficult periods.

With the industry commentary now complete, it’s time to focus on what’s happening now. It’s clear that after a period of strong demand growth — not least from passengers catching up on travel plans that were postponed due to pandemic-related lockdowns — airlines have significantly increased capacity, so that supply is outstripping demand. As a result, airlines like Delta Air Lines and United Airlines reported slightly disappointing second-quarter results and provided moderate forecasts for the third quarter.

Delta Air Lines, for example, is forecasting third-quarter revenue growth of 2% to 4% despite a projected 5% to 6% increase in capacity, indicating pressure on profitability.

Is this time different?

While these are some of the most famous last words in investing, they may be true in this case. In an ideal world, market participants would gradually “price in” risk as it grows. In reality, however, they often refuse to do so until there is one big shock event that changes perceptions for a while. I think the pandemic was that shock event, and the airline industry could learn to be more reactive by cutting capacity when demand exceeds supply, as it is doing now.

That seems to be the view of Delta management, with CEO Glen Hauenstein noting that “I’ve never seen the industry react so quickly to an oversupply” and “the industry has already reacted. And I think it’s very different than years ago, when that was sustained for an extended period of time” during a recent earnings conference call.

CEO Ed Bastian noted that cutting capacity is the first step that unprofitable airlines can take to improve results.

United Airlines management feels the same way, with CEO Scott Kirby saying industry capacity exceeded demand in the second quarter. But industry rationalization is already underway, with Kirby saying it could be seen “in earnest in the second half of August in flight schedules” and “As a result, domestic industry capacity growth looks set to be down about 5 points by the fourth quarter compared to where we were in the second quarter.”

The story continues

As such, it wouldn’t be surprising if pricing conditions improved in Q3, and given that Delta’s full-year low-end guidance of $6-$7 implies 7.6 times 2024 earnings, the stock looks like a great investment.

Nevertheless, investors must remember that the last CrowdStrike The software update incident caused Delta to cancel thousands of flights and will have to issue refunds to customers and could face fees in the third quarter. As a result, cautious investors are many who want to wait for an update from management on the matter and the likely impact on third-quarter earnings before buying.

Hexcel’s Short-Term Challenges

Hexcel, a manufacturer and marketer of advanced graphite composites for the aerospace, defense and industrial markets, is facing near-term headwinds in its commercial aerospace end markets, but for very different reasons.

About 60% of its sales go to the commercial aerospace industry, with almost all of that going to Airbus, Boeing, and its subcontractors. About 39% of total sales went to Airbus and its subcontractors in 2023, while Boeing and its subcontractors accounted for 15%.

As such, when Airbus and Boeing reduce their aircraft delivery expectations (as they did in 2024), Hexcel will see that in its sales. There is very little aftermarket demand for its products, so aircraft production is its key end market.

Unfortunately, Hexcel lowered its full-year guidance during its second-quarter earnings conference call:

• Full-year sales are expected to be between $1.9 billion and $1.98 billion, down from the previous range of $1.925 billion to $2.025 billion.

• Full-year adjusted diluted earnings per share are expected to be between $2.02 and $2.18, down from the previous range of $2.10 to $2.30.

Strong growth at a reasonable share price

The lowering of expectations is disappointing, especially given that Hexcel has been adding capacity in preparation for a larger increase in aircraft production in 2024, so its margins will also be low.

Despite this, Airbus and Boeing still have many years of backlogs, and the main way to increase profits is Is delivering more aircraft, especially since profit margins typically increase with increasing delivery volumes.

Management’s revised guidance calls for about $200 million in free cash flow (FCF) this year, with more than $800 million total from 2024 to 2026. Those numbers would put Hexcel at 26 times its FCF in 2024 and less than 20 times FCF, assuming an average FCF of one-third of $800 million. That’s too low for a company that is likely to grow long-term revenue as it ramps up aircraft deliveries and newer planes use more advanced composite content.

Is it worth investing $1,000 in Delta Air Lines right now?

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends CrowdStrike. The Motley Fool recommends Delta Air Lines and Hexcel. The Motley Fool has a disclosure policy.

2 Great Stocks to Buy as Earnings Season Dips Originally Posted by The Motley Fool