Howmet Aerospace Issues $1.2 Billion in Debt Amid Stretched Valuation and Strong Aerospace Tailwinds

What happened

Howmet Aerospace has announced a $1.2 billion debt offering, pricing notes with maturities from 2028 to 2036 at interest rates between 3.750% and 4.750%, expected to close in March 2026. This move occurs as the company benefits from robust commercial aerospace demand, with management guiding for higher 2025 sales, EPS, and operating cash flow driven by engine spares and OEM production ramps. Despite a solid balance sheet with Net Debt/EBITDA at 1.58x and interest coverage of 11.7x, the stock trades at elevated multiples, including a P/E of 55 and EV/EBITDA of 38, well above the DCF anchor of $135. The debt issuance likely aims to fund growth initiatives like Engine Products capacity expansions or support shareholder returns, but it risks increasing leverage in a high-valuation environment. Investors should scrutinize the timing, as added debt could exacerbate financial strain if anticipated aerospace growth falters due to Boeing production issues or titanium sourcing disruptions.

Implication

In the near term, the debt enhances Howmet's liquidity and flexibility to invest in capacity expansions aligned with industry demand, such as for CFM LEAP engines and Airbus narrowbodies. However, it elevates net debt, potentially pressuring the Net Debt/EBITDA ratio if earnings growth underperforms amid Boeing production volatility or geopolitical risks. Given the stretched valuation with a DCF anchor of $135 versus a $190 spot price, any execution missteps could amplify downside, making the stock vulnerable to corrections. Investors must monitor how proceeds are used—if for accretive investments, it could support future cash flows, but if for share buybacks or dividends, it may not justify the increased financial risk. Overall, this move doesn't alter the fundamental investment case but adds a layer of risk, necessitating continued focus on OEM production trajectories, cash generation, and balance sheet metrics.

Thesis delta

The debt offering introduces slight incremental leverage, but given Howmet's strong balance sheet and investment-grade ratings, it does not materially shift the core HOLD thesis based on stretched valuation and quality business fundamentals. However, it highlights increased financial risk that requires closer monitoring of debt levels and interest coverage, especially if Boeing production issues or titanium tariffs worsen. The thesis remains unchanged, but the risk profile is modestly elevated, reinforcing the need for a better entry point or evidence of upside to growth assumptions before considering an upgrade.