2023-09-01 07:00:00 ET
Summary
- Curtiss-Wright Corporation is a global integrated business that provides engineered products and services to aerospace, defense, and industrial markets.
- The company saw double-digit growth in sales and operating profits in the second quarter, driven by aerospace and defense segments.
- Curtiss-Wright has provided financial guidance for 2023, targeting sales growth in all segments and expecting increased operating income.
In a recent report , I analyzed Curtiss-Wright Corporation (CW) and assigned a Hold rating based on its low upside when valued against its median EV/EBITDA, while the industry EV/EBITDA median flashed a buy signal with 26% upside. Since the publication of my first report, Curtiss-Wright Corporation stock has gained 20.1%. In this report, I revisit the company and analyze the latest results and its valuation.
What does Curtiss-Wright Corporation do?
Curtiss-Wright Corporation is a global integrated business that provides engineered products, solutions, and services mainly to aerospace and defense markets, as well as critical technologies in commercial power, process, and industrial markets. The Company's segments include: the Aerospace & Industrial segment, which is comprised of businesses that provide a diversified offering of engineered products and services supporting critical applications primarily across the commercial aerospace and general industrial markets; the Defense Electronics segment is comprised of businesses that primarily provide products to the defense markets and to a lesser extent the commercial aerospace market; and the Naval & Power segment is comprised of businesses that provide products to the naval defense market and to a lesser extent the power and process markets. Its product offerings include electronic throttle control devices and transmission shifters, turret aiming, and stabilization products, among others.
56% of its sales are derived from defense, while 11% is derived from commercial aerospace, bringing the share of aerospace & defense to 67%, with commercial industries providing the remaining 33% via 18% power & process sales and 16% general industrial sales. The distribution of the end-market sales provides an indication that Curtiss-Wright might be benefiting from commercial aerospace sales growth, but growth in defense sales is what really moves the needle for the company. So, this looks like a name better positioned to benefit from defense sales growth than commercial OEM growth.
Curtiss-Wright Financials Show Double-Digit Growth
In the second quarter , Curtiss-Wright saw its sales increase by 16%. Aerospace Defense revenues grew 23% driven by aerospace growth both in the commercial and defense segment. Aerospace Defense sales grew 40% driven by the acquisition of the arresting systems business from Safran ( SAFRF ) last year, while the commercial segment grew 20% on sensor and services demand. Combined aerospace sales grew 31%. Ground Defense was hit by supply chain issues and those are now fading. Naval Defense sales grew 5% where submarine supply chain issues have eased somewhat but those improvements were partially offset by aircraft carrier revenue timing.
The commercial market saw sales increase by 4% showing really well how aerospace and defense is the growth part of the company. That growth is currently in the form of supply chain recovery as well as higher demand for the commercial aerospace and defense end markets.
On 16% sales growth, Curtiss-Wright achieved $115 million in operating profits indicating 18% growth. The $17 million increase in operating income was driven by a 77% increase in Defense Electronics results and a 10% increase in Aerospace & Industrial profits while Naval & Power results declined by 1% reducing the margins by 230 bps due to unfavorable mix and timing. Free cash flow of $99 million grew significantly from the $22 million in the same period last year.
A Look At The 2023 Financial Guidance For Curtiss-Wright
For the year, the company targets 7 to 9 percent growth increasing the guidance by $20 million to $25 million in Aerospace & Industrial, 9 to 12 percent in Defense Electronics increasing the guidance by $25 million to $30 million while Naval & Power sales are indicated to be 8 to 10% higher year-over-year and $25 million to $30 million higher. So, in absolute terms we see the guidance update to be in the same range for each segment.
In terms of operating income, the margins are expected to be up 10 to 30 bps and up 8 to 11 percent year-over-year with strong performance in commercial aerospace as well as ground defense. What we see is that despite pressures in Naval & Power due to supply chain issues and shifts towards lower margin programs, the company is on track to deliver increases in income that outpace growth in revenue.
Does Curtiss-Wright Corporation Pay A Dividend?
In May 2023, Curtiss-Wright increased its quarterly dividend from $0.19 per share to $0.20 per share, providing a 5% bump, which is nice, but given that its forward yield is 0.4% this most definitely is not a name you want to be holding for its dividend. Stock price growth is what you want to hold this name for, because for the yield on cost to be attractive many dividend increases need to be announced and those increases should be significantly higher than the dividend growth of just 5%.
Curtiss-Wright Stock: A Buy, Sell Or Hold?
Stock valuation Curtiss-Wright using evoX Financial Analytics (The Aerospace Forum)
For stocks, it is always difficult to determine the "fair" stock price because there are so many ways one can value a stock. I entered the numbers for Curtiss-Wright into the evoX Financial Analytics tool and, based on the industry multiple, there is a significant upside.
However, this is not the typical multiple that the company trades on. If we look at the price targets implied when using the company median for EV/EBITDA, we see that the company is priced in for earnings two years ahead. Companies often do not trade according to their current year expectations. Curtiss-Wright seemingly trades with earnings of 2025 factored in.
I previously expressed my expectation that Curtiss-Wright stock would start factoring in 2025 earnings into its share price, and that has happened with the stock trading now within 1% of its implied share price for 2025. Even on expansion of the EV/EBITDA multiple to industry standard, the upside would be around 10% this year and also around 10% in the years after.
Generally, I am looking for companies with better returns. As a result, I would mark the stock a Hold, allowing existing investors to capitalize on any multiple expansion for Curtiss-Wright.
Conclusion: Curtiss-Wright Stock Remains A Better Hold Than Buy
The results of Curtiss-Wright Corporation are mixed but strong in my view. We shouldn’t look at the free cash flow profile to make forward projections because free cash flow tends to be heavily backloaded. From a valuation perspective, the upside to Curtiss-Wright Corporation mainly lies in multiple expansion for the company to trade more in line with peers. The current stock price based on the company median EV/EBITDA suggests Curtiss-Wright Corporation’s stock price is fairly valued. As a result, I am maintaining my Hold rating for the stock.
For further details see:
Curtiss-Wright: Can It Continue To Outperform?