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Rockwell Collins, Inc. (COL): Zacks Rank Buy

Todd Bunton

Rockwell Collins, Inc. (COL) offers investors solid growth and income at a very reasonable price.

Based on current consensus estimates, analysts project double-digit EPS growth over the next two years. On top of this, the company pays a dividend that yields a solid 1.6%.

And estimates have been rising after the company delivered better than expected fourth quarter results, sending the stock to a Zacks #2 Rank (Buy).

Company Description

Rockwell Collins provides communications and aviation electronics solutions for both commercial (47% of sales) and military (53%) applications.

The company is headquartered in Cedar Rapids, Iowa and has a market cap of $8.6 billion.

Fourth Quarter Results

Rockwell Collins delivered solid fourth quarter results on January 19. Earnings per share came in at 86 cents, beating the Zacks Consensus Estimate by a penny. This was a 5% increase over the same quarter in 2010.

Total sales declined 1% to $1.094 billion, but this was ahead of the Zacks Consensus Estimate of $1.086 billion. The Commercial Systems segment saw revenue growth of 13% driven by solid growth in sales related to both original equipment manufacturers (OEMs) and the aftermarket. But this was offset by a 10% sales decline in Government Systems.

Operating income increased 2% as the operating margin expanded 60 basis points to a stellar 19.9% of sales.


Following solid Q4 results, management reiterated its EPS guidance of $4.40 to $4.60 for 2012. Analysts revised their estimates modestly higher, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2012 is now $4.48, within guidance, and representing 14% growth over 2011 EPS. The 2013 consensus estimate is currently $5.03, corresponding with 12% annual growth.

Cuts in defense budgets threaten growth over the next few years, but analysts are still optimistic that market share gains, high profit margins and continued share repurchases will drive double-digit EPS growth over the long-term.

Returning Value to Shareholders

Rockwell Collins has a solid balance sheet which has allowed it to buyback shares and pay a stable dividend.

In fact, during the first quarter of 2012 the company issued $250 million in debt at an interest rate of just 3.10%. This money, along with cash of hand, was used to repurchase 7.1 million shares of its stock at a total cost of $385 million.

The company also pays a dividend that yields a solid 1.6%. It has paid the same 24 cent per share quarterly dividend since 2008. But its payout ratio is a relatively low 25%, so the company has plenty of room to increase its dividend if it chooses.

Reasonable Valuation

Valuation looks reasonable for COL with shares trading at just 12.4x 12-month forward earnings, a significant discount to its 10-year median of 17.0x.

Its price to cash flow ratio of 11.7 is also below its historical multiple of 13.7.

The Bottom Line

With rising estimates, strong EPS growth projections, shareholder-friendly management, a 1.6% yield and attractive valuation, Rockwell Collins offers solid total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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