Howmet Aerospace Inc. (HWM) at $165: A Strategic Entry Point?

The aerospace industry is at a crossroads. Post-pandemic demand for commercial air travel has surged, defense budgets are expanding, and the race to electrify transportation is reshaping supply chains. For investors, the question is whether Howmet Aerospace Inc. (HWM)—a critical supplier to Boeing, Airbus, and defense contractors—is poised to capitalize on these trends at its current valuation. At a price of $165, the stock sits near its 52-week high, but a closer look at its financial trajectory, industry tailwinds, and free cash flow generation suggests this could be a compelling entry point.

Valuation: A Premium, but Justified by Growth

To assess Howmet's valuation, let's start with the basics. As of Q1 2025, the company reported a net income of $344 million, up 44% year-over-year, with an adjusted EBITDA of $560 million—a 28% jump. Annualizing these figures, Howmet's 2025 net income could hit $1.37 billion, while its adjusted EBITDA could reach $2.25 billion (per its guidance). At a current market cap of approximately $67.4 billion (based on $165/share and 406 million shares outstanding), this translates to a P/E ratio of ~49x and an EV/EBITDA of ~29.9x.

To put this in context, competitors like Precision Castparts Corp (now part of Berkshire Hathaway) historically traded at 18-22x EBITDA during cyclical peaks. Howmet's premium multiple, however, reflects its strategic positioning in high-growth segments. Consider that its defense business grew 9% in Q1, and its Engine Products segment—critical for commercial and military engines—saw revenue jump 13% year-over-year. These segments boast record margins (32.6% for Engine Products), suggesting pricing power and operational efficiency.

Industry Tailwinds: Defense, Commercial Aerospace, and EVs

The case for Howmet isn't just about its financials—it's about the megatrends driving its end markets.

1. Defense Spending Surge: Global defense budgets are expected to grow at 3-4% annually through 2030, fueled by geopolitical tensions and modernization programs. Howmet's role in supplying fasteners, engine components, and forged wheels to fighter jets and satellites positions it to capture this upside.

2. Commercial Aerospace Recovery: Boeing and Airbus are racing to clear backlogs of over 10,000 undelivered aircraft, with demand strongest for fuel-efficient narrowbodies. Howmet's Engine Products segment, which supplies turbine blades and engine casings, is a direct beneficiary.

3. EV Battery Component Demand: While not a major revenue stream yet, Howmet's aluminum expertise is increasingly being leveraged for lightweight battery enclosures and structural components in electric vehicles. This niche could become a meaningful growth lever as EV adoption accelerates.

Free Cash Flow: The Engine of Shareholder Returns

Howmet's free cash flow (FCF) has been a standout performer. In Q1 2025, FCF hit $134 million—up 41% year-over-year—and the company raised its full-year FCF guidance to $1.15 billion. With a target FCF conversion rate of ~85%, this cash flow is being deployed aggressively to reduce leverage and reward shareholders:

• Debt Reduction: Net debt-to-LTM EBITDA is a record-low 1.4x, down from 2.8x in 2021. This deleveraging leaves Howmet with one of the strongest balance sheets in its sector.
• Buybacks and Dividends: In Q1 alone, Howmet repurchased $125 million in shares at an average price of $124/share, while boosting its dividend by 25% sequentially. At $165/share, these actions suggest confidence in long-term value.

Margin Expansion: The Key to Outperforming

Howmet's margin trajectory is its most compelling argument for sustained outperformance. Its operating margin jumped 520 basis points to 25.4% in Q1, while EBITDA margins hit 28.8%, up 480 bps year-over-year. This expansion isn't accidental:

• Cost Discipline: Howmet has slashed overhead and renegotiated supplier contracts, particularly in its Forged Wheels division, which maintained a 27% margin despite a 13% revenue dip.
• Vertical Integration: By manufacturing key components in-house—rather than outsourcing—Howmet insulates itself from supply chain disruptions and volatile commodity prices.

Near-Term Risks, but Manageable

No investment is without risks. Howmet faces headwinds like:
- Supply Chain Volatility: Tariffs and raw material costs remain a concern, though Howmet has secured fixed-rate debt and passed costs to customers.
- Macroeconomic Uncertainty: A potential recession could dampen commercial air travel demand, though defense and EV segments are more recession-resistant.

Yet these risks are already reflected in the stock's price. With a net debt-to-EBITDA ratio below 2x and FCF coverage of 3x its debt, Howmet has ample liquidity to navigate headwinds.

Conclusion: A Buy at $165, with Upside Ahead

Howmet's valuation may appear steep, but its margin expansion, capital returns, and exposure to defense, commercial aerospace, and EVs justify the premium. The stock's 12-month average price target of $90.67 (as of September 2024) is outdated; the May 2025 forecasts already suggest a range of $125-$137, and the company's fundamentals argue for a re-rating.

At $165, investors are paying for a business with:
- 28% EBITDA margins and 25% operating margins, among the highest in aerospace.
- $1.15B in FCF annually, fueling shareholder returns.
- A net debt-to-EBITDA ratio of 1.4x, providing flexibility to invest in growth.

The risks are real, but the long-term catalysts—defense budgets, commercial aircraft replacements, and EV adoption—are too large to ignore. For investors with a 3-5 year horizon, Howmet at $165 isn't just a strategic entry point—it's a bet on a company that's built to dominate its markets.

Action: Consider a gradual position in HWM at $165, with a 12-month price target of $185-$200, driven by margin expansion and FCF growth.