TXT - Moog: New CEO Could Capitalize On Growth Catalysts

2023-05-23 13:13:52 ET

Summary

• Moog has shown lackluster performance for years.
• The company has exposure to high in-demand platforms in the commercial airplane and defense industry.
• New CEO could finally introduce a margin focused approach to improve performance.

The aerospace industry offers a lot of opportunities for investors. However, detecting the gems in the industry can be a challenge as aerospace products are complex and production and development cycles can be lengthy. In this report, I will be looking at Moog ( MOG.A ) and assess whether the stock has any appeal.

About Moog: Involvement Ranges From Space to Defense to Commercial Airplanes

Since this is the first time I cover Moog, a description of the company might be the right point to start. Moog Inc. is a designer, manufacturer and systems integrator of precision motion and fluid control and control systems for a range of applications in aerospace and defense and industrial markets. It operates through three segments: Aircraft Controls, Space and Defense Controls and Industrial Systems. Its products and systems within aerospace and defense market includes primary and secondary flight controls for military aircraft, turreted weapon systems, stabilization and automatic ammunition loading controls for armored combat vehicles, tactical and strategic missile steering controls and gun aiming controls, commercial aircraft market, which includes primary and secondary flight controls for commercial aircraft and space market, which include satellite positioning controls and thrust vector controls, as well as integrated space launch vehicles and hypersonic applications. The company also offers digital airfield solutions for commercial and military airfields.

Perhaps the company description does not provide a lot of insight. An overview of the programs that Moog works on shows that the company is involved with quite a number of high profile programs in the defense and commercial sphere. In Defense, there is the F-35 from Lockheed Martin ( LMT ), the Bell Textron Valor from Textron ( TXT ) and the Boeing (BA) KC-46A, among others. Those are just the military aircraft programs, but the company also has exposure to the M-1 Abram tanks, Bradley vehicles, various submarines and rockets including the Patriot missile defense system. In the commercial aircraft space, the company has involvement in all key programs while its exposure to the SLS in the space segment is notable.

Moog Shows Lackluster Performance

If you would just look at the involvement in key programs, this looks like a great company. However, the reality is that the company has not been able to convert sales growth into higher profits or cash flow.

When analyzing aerospace companies for investment, what I tend to look for is a combination of stability from defense and the high growth prospect from commercial airplanes. Moog has that, even though it does not quite translate that into sales. For the second quarter, military aircraft sales declined by 9% while commercial airplane sales grew by 44%, space sales grew by 10% and industrial systems sales grew by 3% for a total sales growth of 9%. Commercial airplanes activity is going up both in build rate and flight activity and we see that back in sales while continued challenges for the defense supply chain also are visible.

EBITDA improved by 2%, and that really shows the disappointing performance of Moog realizing 9% topline growth and only 2% profit growth. This was primarily driven by the aircraft controls margins which weakened due to mix and charges. In the space segment, things seem stable but margins were eroded by 270 bps to 11.7% on space vehicle program charges. So, I would say that the results from the past as well as the most recent quarterly earnings show that the company has a lot of potential but it's translating very little of that to shareholder value.

Is Moog Stock a Buy on Margin Focus?

Moog's leadership knows that the company's performance is subpar, especially given the programs it has exposure to. There's a lot of growth potential in the commercial airplane space and the current budgetary environment for defense also offers opportunities. So, Moog has to start focusing on how to translate that into value and we will likely hear more during the Investor Day in June.

I'm inclined to mark the stock a buy. I added the numbers for Moog to the valuation tool that I'm currently populating with companies in the aerospace and airline industry and will soon launch for subscribers of The Aerospace Forum and what I found is that with the expected earnings for the remaining two quarters there is around 11% upside and with FY2024 earnings in mind that upside increases to nearly 20%. Obviously, the risk is that the company is not able to deliver on its promise to improve margins, so that's a risk but the company has the involvement in growing programs, so there's definitely support for better results.

Conclusion: Moog is a Buy on Growth Catalysts And Focus on Margins

Moog is not a company that you should be buying for its strong track record on translating sales into profits, cash or shareholder value because it has failed miserably in that regard over the past years. However, with a new CEO and the growth platforms in place we could be seeing a fresh business course that could finally translate into value for shareholders.

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