Howmet's Commercial Transportation Weakness Confirms Segment Risk Amid Aerospace Strength

What happened

Howmet Aerospace's Forged Wheels segment, which supplies aluminum wheels for heavy-duty trucks in commercial transportation, is facing revenue pressure as Q3 revenues declined 3% year-over-year due to slowing truck builds and rising costs. This weakness highlights ongoing challenges in the commercial transportation market, aligning with the DeepValue report's acknowledgment of this segment as part of Howmet's diversified business model. Despite this headwind, the company's overall outlook remains supported by robust demand in commercial aerospace, particularly in engine products and spares driven by Airbus and Boeing production increases. Management's guidance for higher 2025 sales and cash flow is primarily anchored to these aerospace tailwinds, which help mitigate the impact from transportation softness. However, investors should note that the stretched valuation multiples already price in much of the aerospace upside, leaving limited buffer for additional segment-specific pressures.

Implication

The decline in commercial transportation revenues underscores the need to monitor segment-specific risks, as it could pressure overall margins and cash flow if sustained. Howmet's aerospace segments continue to benefit from structural demand tailwinds, such as Airbus A320 ramps and CFM LEAP engine output growth, which support management's positive 2025 guidance. However, the stock's elevated valuations (P/E 55, EV/EBITDA 38) already reflect much of this aerospace optimism, offering little margin of safety. Any further deterioration in commercial transportation or unexpected setbacks in aerospace execution could exacerbate downside risks, particularly given Boeing production variability and titanium sourcing concerns. Therefore, while the core investment case remains intact, investors should maintain vigilance on segment mix shifts and broader economic indicators that could affect both transportation and aerospace demand.

Thesis delta

The new article reinforces the known headwind in Howmet's commercial transportation segment, confirming it as a persistent risk that was already factored into the DeepValue report's HOLD recommendation. No fundamental shift in the thesis is required, as the core investment narrative remains centered on aerospace growth outweighing transportation weakness. However, if this segment's decline deepens or spreads to other areas, it could challenge management's cash flow projections and warrant a more negative reassessment.