Howmet Aerospace, the Pittsburgh-based industrial titan known for its high-performance metal products, just announced a stellar first quarter. Record revenue, record profit, record margins—all music to investors' ears. But amidst the celebration, a subtle shift in the company's narrative hints at a potentially explosive growth story that may have slipped past most analysts' radar: **the aftermarket**.

Howmet, for all its industrial might, isn't typically associated with the fast-paced, high-growth world of aftermarket sales. The company, spun off from Alcoa in 2016, thrives on long-term agreements (LTAs) with aerospace giants like Boeing and Airbus, supplying them with critical engine and airframe components. These agreements, while providing stability and predictability, also limit the company's ability to capitalize on short-term market fluctuations.

However, a closer look at John Plant's commentary during the Q1 2024 earnings call reveals a distinct change in tone regarding the aftermarket. Plant, a seasoned veteran known for his astute market observations, painted a picture of burgeoning spares demand, driven by several converging factors.

Drivers of Aftermarket Demand

Strength of the CFM56 Engine: Plant highlighted the ongoing strength of the CFM56 engine, a workhorse in the narrow-body aircraft segment. Despite being a "past model," the CFM56 is experiencing a surge in spares demand, fueled by airlines pushing their existing fleets harder to meet the booming travel demand. Plant expects this trend to continue, with the peak of CFM56 spares revenue potentially arriving in 2025 or even 2026.Structural Shift in Spares Demand for Newer Engines: Plant pointed to the "structural shift" in spares demand for newer engines like the LEAP and Geared Turbofan. These engines, designed for increased fuel efficiency, operate at higher temperatures and pressures, leading to accelerated wear and tear on key components like high-pressure turbine blades. This, in turn, translates into more frequent service shop visits and a sustained increase in replacement part demand."Time on Wing" Issues: Plant emphasized the impact of widely reported "time on wing" issues affecting both the LEAP and Geared Turbofan engines. These issues necessitate additional shop visits and further boost spares demand. While Plant acknowledged that he might have overstated the duration of this "bubble" of revenue, he clearly expects it to contribute significantly to Howmet's top line in the coming years.

Evidence of Aftermarket Growth

To back up his bullish outlook, Plant revealed a crucial detail: Howmet's commercial aerospace spares revenue has already climbed back to its 2019 level of $400 million, having previously dipped by half during the pandemic. Even more tellingly, the run rate in Q3 and Q4 2023 suggests that spares revenue is now tracking well above $400 million, with further acceleration anticipated in the second half of 2024.Plant's commentary on defense spares reinforces this narrative. He anticipates that F-35 spares revenue will reach parity with OE revenue by 2025, driven by the growing global fleet of these advanced fighter jets.Adding all these factors together, Plant revealed that Howmet's total spares business for 2023 likely reached the $1 billion mark, a significant jump from the $800 million recorded in 2019. He expects this upward trajectory to continue in 2024, with spares potentially accounting for a greater share of Howmet's total revenue going forward.

Revenue Mix Shift and Growth Implications

This subtle shift in Howmet's revenue mix could have profound implications for the company's growth trajectory. While LTAs will likely continue to form the bedrock of Howmet's business, the accelerating aftermarket demand presents an opportunity for the company to tap into a higher-growth, higher-margin revenue stream.

Hypothetical Scenario: Spares Revenue Growth

This scenario assumes that Howmet's total spares revenue grows by 25% year-on-year in 2024, reaching $1.25 billion. Assuming a conservative EBITDA margin of 25% for spares (compared to the company's overall EBITDA margin guidance of 24%), this would translate to $312.5 million in incremental EBITDA from spares alone.This is a substantial figure, especially considering that Howmet's total EBITDA guidance for 2024 is $1.75 billion. Even if only a portion of this projected spares growth materializes, it could significantly bolster Howmet's profitability and drive outsized earnings growth.

The Overlooked Growth Engine

The market, fixated on Boeing's production woes, may be overlooking this potentially powerful engine of growth for Howmet. As the aftermarket takes flight, Howmet, with its differentiated technologies and leading market position, is poised to reap the rewards, potentially exceeding even the most optimistic expectations.

Aftermarket Revenue Breakdown

The following chart illustrates the hypothetical breakdown of Howmet's aftermarket revenue, emphasizing the growth of commercial aerospace spares.

"Fun Fact: The CFM56 engine, a key driver of Howmet's aftermarket growth, is one of the most popular aircraft engines in history, with over 35,000 units produced. Its widespread use and enduring popularity ensure a robust demand for spares for years to come."