ATRO - Astronics Stock Could Be A Buy But Risks Remain

2023-10-31 17:10:45 ET

Summary

• Astronics Corporation is a provider of advanced technologies to the aerospace, defense, and electronics industries.
• The company has exposure to growth platforms in commercial airplanes, in-flight entertainment, and connectivity solutions.
• While Astronics stock is a buy, the weak cash position and uncertainty in aircraft program production rate increases somewhat reduce the appeal.

I am constantly looking to expand coverage in the aerospace and closely related industries. My coverage includes over 140 names and I am now adding a new name to that coverage, namely Astronics Corporation (ATRO). In this report, I will briefly discuss what the company does, why it is positioned well for growth and what the price target and rating is based on forward projections.

What Does Astronics Do?

Astronics Corporation is a provider of advanced technologies to the global aerospace, defense and electronics industries. The Company operates in two segments: Aerospace and Test Systems. The Aerospace segment designs and manufactures products for the global aerospace industry.

Product lines include lighting and safety systems, electrical power generation, distribution and seat motion systems, aircraft structures, avionics products, systems certification, and other products. The Test Systems segment designs, develops, manufactures and maintains automated test systems that support the aerospace and defense, communications and mass transit industries as well as training and simulation devices for both commercial and military applications. The Company’s products and services include electrical power generation and distribution systems, seat motion solutions, lighting and safety systems, avionics products, aircraft structures, systems certification, and automated test systems. In the most recent quarter, aerospace revenues accounted for more than 85% of all revenues.

Astronics Has Exposure To Growth Platforms

The name "Astronics" might suggest that the company focuses heavily on space, but the fact is that the company has a wide arrange of airplane programs in its profile allowing it to leverage positive demand trends in transport, business jets and military.

For commercial airplanes, the company provides standard items such as fuel access doors and the passenger service units as well as buyer furnished equipment or BFE which are optional items selected by the customer. Generally, on wide body programs the content value is significantly higher compared to single aisle jets but for Astronics this is not necessarily true as it does not provide the PSU for the Boeing 787 and Airbus A350.

There are, however, significant growth opportunities ahead as key commercial programs will be going up in monthly production rates in the future providing 67% growth in commercial airplane sales on the standard equipment. Commercial airplanes sales currently generates around $635 million in annualized revenue and account for 70 percent of the aerospace revenues or more than 60% of all sales. Just the value of standard equipment shipments could increase commercial transport segment sales by 5.5% in the years to come as commercial airplane programs go up in rate or around 11% expressed as the line fit revenues.

Astronics also provides in-flight entertainment and connectivity solutions, which is a $6 billion market. In June, the company announced a commitment to install USB and USB C type connectors on 1,100 airplanes with options for hundreds more. While those connectors won’t be installed overnight, the value of such a deal would be $77 million to $154 million which is significant for a company that currently has $175 million in quarterly sales.

The BFE sales are tricky because there are various suppliers able to provide the BFE and the items are optional, but based on production rates this market will grow by 64% in the coming years and we note that on the in-seat power supply Astronics has a >90% market share, so if airlines select the in-seat power supply, a significant portion of the BFE value is likely to be locked in by Astronics.

Is Astronics Stock A Buy?

I do like the high-barrier in-seat power supply segment in which Astronics is ruling the market providing upside in the OEM market on higher build rates as well in the after-market sales providing retrofit and service opportunities. The big question of course is whether that makes the stock a buy. I actually believe it is and have put a $21 price target on the stock. It should be noted that from 2024 to 2025 analysts are currently expecting a decline in EBITDA and while program transitions could have that transient effect, I am not quite sure whether EBITDA will in fact be lower year-over-year in 2025.

While I have a buy rating on the stock, I will be closely monitoring this stock as the company is not breaking even on cash flow basis and forward projections boast a relatively low free cash flow margin of low single digits. Any miss in operational performance or any stagnation in top line growth will increase the cash burn and require the company to dip in credit facilities.

Conclusion: Astronics A Buy, But Not A Convincing One

I like the upward potential for Astronics’ business and believe that while production rates might slip, there is significant upside for the stock and perhaps Astronics currently even is somewhat undervalued compared to its 2023 earnings. The company achieved a buy rating in my scoring system, but one thing that I most certainly am somewhat cautious on is the absence of positive free cash flow and a relatively small cash position. If we don’t see significant uptick in the years ahead on cash flow generation, the company will be stuck in a circle of refinancing debt kicking the can down the road and it could even result in shareholder dilution as the company can issue stock which would could eventually be used to pay off any maturing debt on the credit facility by 2026. So, I do see upside, but given the weak cash position and the uncertainty on timing of aircraft program production rate increases, Astronics Corporation stock is a buy but not a convincing one.

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