Howmet Aerospace is an aerospace and industrial company, selling high-performance components, including jet engine parts like turbine blades, vanes, and other critical parts made from nickel, titanium, and aluminum alloys. The company’s aluminum and titanium structural components are used in commercial and military aircraft—as well as precision fasteners and installation tools for airframe structures. Howmet also produces parts used in gas turbines (power generation) and precision castings, fasteners, and other components for automotive applications. Over the past few years, Howmet has grown revenues, net income, and free cash flow considerably faster than the economy’s overall growth. The company pays a modest dividend but has been raising it regularly. A more meaningful cash return to shareholders has come in the form of share buybacks. The most recently authorized $2 billion buyback announced about eleven weeks ago would represent about 4.7% of the company’s outstanding shares as of Friday’s closing price. The company’s operating performance and the tailwinds in the global aerospace industry were among the reasons I have been bullish on the company, something I reiterated only a week ago. The shares hit new all-time highs on Friday. HWM ALL mountain Howmet Aerospace, all time However, continued problems at Boeing have me wondering if that company’s challenges may trickle down to its suppliers. About 5.7% of Howmet’s revenue comes from Boeing , which is greater than 4.6% of its revenues from Airbus. However, some of the company’s revenues are derived indirectly from jet engine manufacturers General Electric, 12% of revenues, and Rolls-Royce, which represents 5.34%. A slowdown in Boeing production rates would presumably also slow parts supplier sales, and it’s hard to see how Boeing production will not be impacted by the 17,000 job cuts in their global workforce that they announced this week. Complicating matters is that the company’s growth has not gone unnoticed by investors. Over the past five years, Howmet shares have appreciated by 370%, outperforming the S & P by more than 260% and the industrials index by about 280%. The company’s excellent financial results have driven some outperformance, but much of it has come from multiple expansions. Pick your metric, price-to-sales, price-to-earnings, and EV/EBIT. Each of these multiples has expanded materially. The chart below compares the P/E Ratio of Howmet to the S & P 500 over the past five years. The trade I don’t like attempting to time tops and bottoms — not for the market or single stocks, and fundamentals aren’t a timing tool. However, one would think that some of Boeing’s travails will impact its suppliers, and management may get some questions about possible impacts on their earnings call when Howmet reports on November 6. One way to play countertrend looking ahead to earnings is with a calendar put spread. Right now, the options market implies a move of slightly over 9%, higher or lower, between now and November expiration, which will capture both earnings and the election. Rounding up to 10%+/-, I selected the strike closest to a downside move of that magnitude, or $92.50. Trading example : Sell Nov. 15 $92.50 put Buy Apr. 17 $92.50 put The example I provide here would risk $2.95 per contract/share ($295 in total as each contract represents 100 shares), or well under 3% of the current stock price, and would see peak profits Howmet falls post earnings to the $92.50 strike price. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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