RTX (NYSE: RTX) is a fine and worthy stock that offers investors a balanced exposure to commercial aerospace and defense industries. That said, the stock has had a great run (up 47.5%) as the company has derisked itself after the discovery of manufacturing problems with the geared turbofan (GTF) engines that its Pratt & Whitney unit makes for the Airbus A320neo. It has been making good progress on removing, inspecting, and, where needed, replacing parts on those engines. As such, much of RTX's potential good news is already baked into its stock price. That's one reason why looking at advanced materials company Hexcel (NYSE: HXL) might make more sense for its more significant upside potential.

RTX looks fairly valued

RTX has had an excellent year due to its commercial aerospace operations. The GTF inspections are progressing as expected, and alongside the rest of the aerospace industry, RTX's commercial aerospace aftermarket sales have outperformed expectations. On the other hand, management lowered its full-year free-cash-flow (FCF) guidance mainly due to legal matters relating to its defense business and charges to terminate a fixed-price development defense program.

The issues highlight margin challenges that many defense contractors have had, notably over fixed-price programs. Boeing and Lockheed Martin have had similar issues, so it's probably not a coincidence.

Why Hexcel has struggled in 2024

In contrast, Hexcel has not had a great year. Its advanced carbon fiber composites have minimal aftermarket sales and are used almost exclusively by original equipment makers in its key aerospace market. In other words, Hexcel depends on new airplane production. For reference, about 39% of its total sales were to Airbus and its subcontractors in 2023, while Boeing and its subcontractors were responsible for 15%.

Unfortunately, both airplane manufacturers have lowered their forecasts for deliveries this year, which is why Hexcel's stock is down almost 19% in 2024. Having started the year expecting revenues in the range of $1.925 billion to $2.025 billion, Hexcel lowered its guidance range to $1.9 billion to $1.98 billion when it delivered its second-quarter results in July. It also dialed the midpoint of its earnings per share guidance range back to $2.10 from $2.20. The ongoing strike by workers at Boeing isn't helping sentiment toward Hexcel either.

Why Hexcel can outperform

Having explored why Hexcel stock is where it is today, it's time to turn to the more important matter of where it's going.

While Hexcel undoubtedly faces some near-term risks that investors can't readily discount, its long-term prospects continue to look excellent for two key reasons.

First, while Boeing and Airbus have lowered their airplane delivery expectations for 2024, they continue to have multiyear backlogs and will do anything they can to ramp production and delivery rates. That may well result in Boeing taking on more debt or raising equity, which wouldn't be good news for its shareholders, but would help improve production rates. As such, it looks like the revenues Hexcel will miss out on this year are being deferred rather than canceled. It should be able to get those sales back in the future.

Management believes the current backlog of Airbus and Boeing represents more than $9 billion in future sales for Hexcel -- more than four years' worth of sales at current annual rates. In addition, Boeing's long-term commercial market outlook calls for the world to need almost 44,000 new airplanes over the next 20 years.

Second, Hexcel is a play on increased airplane production and an increase in composite materials' share of airplane content. That growth would increase its revenues. This is seemingly an inevitable trend as composites' greater strength and lighter weight (compared to aluminum) improve jets' fuel efficiency and help operators meet their goals for reducing carbon emissions.

As such, a ramp-up in producing composite-rich widebody planes like the new Boeing 777X, the Boeing 787, and the Airbus A350 will boost Hexcel's sales. Similarly, the narrowbody Airbus A320neo family and the Boeing 737 MAX contain significantly more Hexcel content than their legacy variants.

A stock to buy

RTX would be a worthy addition to any investor's portfolio, but it looks fairly valued, and there are some questions about defense contractors' margins in general. On the other hand, Hexcel looks well placed for long-term growth, and if you can tolerate the potential for some bad news in the near term (particularly as the Boeing strike rumbles on), it would be an outstanding stock to buy on weakness.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Hexcel, Lockheed Martin, and RTX. The Motley Fool has a disclosure policy.

Should You Ignore RTX and Buy This Magnificent Aerospace Stock Instead? was originally published by The Motley Fool