Shareholders of Hexcel would probably like to forget the past six months even happened. The stock has dropped 21.7% and now trades at a new 52-week low of $46.48. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Hexcel, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Even with the cheaper entry price, we're swiping left on Hexcel for now. Here are three reasons why we avoid HXL and a stock we'd rather own.

Why Is Hexcel Not Exciting?

Founded shortly after World War II by a group of engineers from UC Berkley, Hexcel (NYSE:HXL) manufactures lightweight composite materials primarily for the aerospace and defense sectors.

1. Revenue Spiraling Downwards

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Hexcel struggled to consistently generate demand over the last five years as its sales dropped at a 4.2% annual rate. This wasn’t a great result and signals it’s a lower quality business.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Hexcel, its EPS declined by 10.5% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Hexcel historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.2%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

Final Judgment

Hexcel isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 20.1× forward price-to-earnings (or $46.48 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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