Is This Defense Stock Still the Smartest Buy After Its Big Run?
Howmet Aerospace posted a nearly sixfold gain over the past three years, but that doesn't mean upside from here is limited.
By Todd Shriber
Trying to find the "best" or the "smartest" stocks to own is a lot like seeking perfection. Investors are apt to feel as though they're aiming at a moving target.
Recalibrate expectations to "smart" from "smartest," and a wider selection universe opens. It includes Howmet Aerospace (HWM 1.75%). This aerospace stock is on a spectacular three-year run, gaining 500% and trouncing the largest industrial, aerospace, and defense exchange-traded funds (ETFs) along the way.
So, with Howmet having played the role of an exponential compounder over the past few years, investors may be leery of it being the smartest stock to buy in the aerospace and defense sector. That's a valid concern, and Howmet may be the smartest name in this industry to buy here and now, but it remains a shrewd idea. Here's why.
Honing in on Howmet
Howmet isn't a dedicated defense stock, but it's a smart idea, as the company does an admirable job of navigating the aerospace and defense industries. Actually, it dances on three floors: commercial air-engine parts, defense hardware, and industrial gas turbines. So it's accurate to say Howmet has multiple revenue levers.
And even better, diversification means all three segments are growing. In the most recently reported quarter, Howmet's revenue growth "laggard" was defense, which posted a sales increase of "just" 13%, while commercial aerospace and gas turbines notched increases of 48% and 39%, respectively.
Still, defense exposure is one reason Howmet is a smart stock to consider. Consider it a "top gun" supplier to defense contracts because Howmet supplies vital parts for the F-35 Lightning II, also known as the Joint Strike Fighter (JSF), among other fighter jets. Put simply, the military aircraft that use Howmet parts don't get off the runway or the aircraft carrier without those parts.
Adding to the case for Howmet as an intelligent defense stock to own is that it's not Boeing or Lockheed Martin competing for government contracts. Rather, Howmet controls a crucial supply and does so in a wide-moat fashion. So while defense isn't Howmet's fastest-growing segment, it's additive to the "smart" thesis.
Howmet earns high marks
Beyond robust top-line growth across its three segments, Howmet offers other reasons that confirm it's a smart choice among industrial stocks. There's the A- credit rating, consistent debt reduction, and double-digit free cash flow margins.
Those attributes support a sturdy balance sheet. Howmet's net leverage is just 0.9x, and the company isn't shy about distributing cash to shareholders. It did so to the tune of $450 million in the first quarter, and its dividend increase streak is now at five years. With an undemanding payout ratio of 10.7%, there's ample room for the payout to grow over the long term.
Putting it all together, "smartest" can be subjective, but Howmet is a smart choice for investors seeking a fundamentally sound industrial stock with upside potential and a durable balance sheet. And that's more than good enough.