Howmet's Margin Expansion: Is the Good News Already Priced In?

Howmet delivered a standout quarter, posting record revenue of $2.09 billion for the third quarter of 2025, a 14% year-over-year increase. This growth was powered by robust demand across its aerospace businesses, with commercial aerospace up 15% and defense aerospace surging 24%. The company's operational execution was equally impressive, with its operating income margin of 25.9% expanding by 300 basis points year-over-year. More broadly, the adjusted EBITDA margin excluding special items of 29.4% climbed 290 basis points, a clear signal of pricing power and cost discipline.

Yet, the market's reaction to this solid performance was notably skeptical. Despite beating both revenue and earnings per share estimates, the stock declined 2.86% in pre-market trading. This disconnect frames the central investment question: is the good news already priced in? The company's valuation reflects extreme optimism, trading at a forward P/E ratio of 50.36X, well above the industry average. After a 79% surge in the past year, the stock is already positioned for continued perfection.

The tension here is classic. Howmet has demonstrated the ability to raise prices and control costs, as evidenced by the sequential margin expansion in its core segments. But the market is looking past the beat to the sustainability of such growth. With guidance for 2026 projecting a 10% revenue increase, the bar for the next quarter is set very high. The pre-market decline suggests investors are not willing to pay for that future growth today, viewing the current price as fully reflective of the strong fundamentals already reported.

Analyzing the Drivers of Margin Expansion

The core question for investors is whether Howmet's impressive margin expansion can continue. The third quarter provided a clear snapshot of the tension between rising costs and pricing power. While the company's cost of sales increased 8.9% year over year, driven by rising input costs and net headcount, it managed to post an adjusted EBITDA margin of 29.4%, a 290-basis point improvement year over year. This offset is the critical signal: operational efficiency and pricing strategies are currently overcoming input inflation.

This dynamic is not new. Howmet has consistently delivered margin expansion, with its adjusted EBITDA margin ticking up from 28.8% in the first quarter to 28.7% in the second, and then to 29.4% in the third. The company attributes this to strong pricing strategies, disciplined cost control and enhanced operational efficiency. The sequential improvement in its core segments-Engine Products, Fastening Systems, and Engineered Structures-showing margin gains of 80, 480, and 510 basis points respectively, underscores that the benefit is broad-based, not isolated to one unit.

Yet, the sustainability of this trend is the market's primary concern. The raised full-year 2026 revenue guidance of approximately $9 billion, up ~10% year over year, signals management's optimism for continued top-line growth. However, it also sets a high bar for the next year. The key risk is that input costs, which are already rising, may not be fully offset by pricing power in a more competitive or slower-growth environment. For context, peers like GE Aerospace and RTX Corp. are also grappling with significant cost increases, though they are managing to grow profits. Howmet's ability to outperform will depend on its unique mix of high-value aerospace components and its execution in a market where demand remains strong but not infinite.

The bottom line is that the margin expansion is real and driven by tangible operational levers. But given the stock's valuation already reflects perfection, the market is rightly asking if these cost pressures are a temporary headwind or the start of a longer-term squeeze that could pressure the impressive margins. The next few quarters will test whether the current pricing power is durable or just a peak.

Valuation and the Risk/Reward Asymmetry

The market's cautious signal after a strong earnings beat is the clearest indicator that Howmet's good news is already priced in. Despite posting record revenue and a significant earnings surprise, the stock declined 2.86% in pre-market trading. This reaction underscores a valuation gap: the company's fundamentals are robust, but its stock price reflects extreme optimism. The forward P/E ratio of 50.36X is a stark multiple of the industry average of 33.02X, meaning investors are paying a premium for flawless execution and sustained growth.

This sets up a classic asymmetry. The stock is already positioned for perfection, leaving little room for error. Any stumble in margin expansion or a slowdown in aerospace demand could pressure the valuation. Yet, a major positive catalyst is on the horizon. Howmet is in the process of acquiring Consolidated Aerospace Manufacturing for approximately $1.8 billion, pending regulatory approval. If cleared, this deal could be a significant value driver, expanding its footprint in high-margin aerospace components and potentially accelerating growth.

The risk/reward here hinges on that pending acquisition. The current price already embeds the expectation of continued margin expansion and top-line growth, as seen in the raised 2026 revenue guidance. The acquisition, if approved, would add a new layer of potential upside that is not yet reflected in the share price. For now, the stock's pre-market decline suggests the market is not willing to pay for that future possibility. The setup is one of high expectations priced in, with a binary catalyst looming.