Ability Inc (NASDAQ:ABIL), a USD$18.06M small-cap, is an aerospace and defence (A&D) company operating in an industry, which is undergoing restructure to capture new tech-driven opportunities. Capital goods analysts are forecasting for the entire industry, a fairly unexciting growth rate of 9.30% in the upcoming year, and an optimistic near-term growth of 27.29% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether ABIL is lagging or leading in the industry. Check out our latest analysis for Ability
What’s the catalyst for ABIL’s sector growth?
Stable global gross domestic product growth, relatively lower commodity prices including crude oil, and strong passenger travel demand, especially in the Middle East and Asia Pacific regions, will likely drive the commercial aerospace sub-sector growth. In the previous year, the industry saw growth of 7.67%, beating the US market growth of 4.49%. ABIL lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its A&D peers. As the company trails the rest of the industry in terms of growth, ABIL may also be a cheaper stock relative to its peers.
Is ABIL and the sector relatively cheap?
The A&D sector’s PE is currently hovering around 25x, relatively similar to the rest of the US stock market PE of 22x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 12.47% compared to the market’s 9.99%, potentially illustrative of past tailwinds. Since ABIL’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ABIL’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ABIL has been an A&D industry laggard in the past year. If your initial investment thesis is around the growth prospects of ABIL, there are other A&D companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ABIL fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ABIL has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its A&D peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ABIL’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Ability’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other capital goods stocks instead? Use our free playform to see my list of over 100 other A&D companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.