Rockwell Collins Remains Neutral
On Jan 21, we maintained our Neutral recommendation on Rockwell Collins Inc. (COL) following stable results for the first quarter of fiscal year 2013 ending December 31, 2012.
Why Reiterated?
Rockwell Collins’ first quarter fiscal year 2013 ending December 31, 2012, adjusted earnings of 94 cents per share outpaced the Zacks Consensus Estimate of 90 cents. Results also came in higher than the year-ago quarterly earning per share of 86 cents. Total sales fell 3% year over year to $1.06 billion, beating the Zacks Consensus Estimate of $1.04 billion. In the reported quarter, Government Systems sales slipped, partially offset by higher Commercial Systems sales.
During the quarter, sales related to aircraft original equipment manufacturers were up 6% year over year to $282 million driven by increased sales of Airbus and The Boeing Company (BA), resulting from higher production rates of the 787 and A330 aircrafts.
Rockwell Collins is the foremost global supplier of communications and avionics equipment for both commercial and military customers. Its balanced exposure to both types of customers allows the company to use government funding to develop products for the dual-end market. The dual-end market leads to higher volume sales, which create economies of scale in cost-sensitive government contracts. In the near term, recovery in the business and regional jet market will boost commercial sales.
On the flip side, however, the U.S. defense spending is negatively impacted by the Budget Control Act of 2011. The first part dictates a $487.0 billion reduction to previously planned defense spending over the next decade. The second part is a sequester mechanism that would impose an additional $500.0 billion of cuts on defense spending, if the Congress is not able to reduce the U.S. deficit by $1.2 trillion.
In order to stem the rot in the massive U.S. debt, President Obama and Congress are struggling to cut more than a trillion dollars in government spending. However, the Congress has not yet passed the 2013 defense department budget proposed last year by the Pentagon. Instead it has approved a level of spending comparable with fiscal 2012.
The pessimistic mood is also shared by the Rockwell Collins management. It is expecting around 10% fall in the top line of its Government Systems business in the ongoing fiscal. Management expects the downslide would only be partially offset by the better performing Commercial Systems business. The upside would stem from a steady recovery in the business and regional jet markets.
Other Stocks to Consider
Other stocks to consider in the aerospace industry are Alliant Techsystems Inc. (ATK) and Triumph Group, Inc. (TGI), which hold a Zacks Rank #1 (Strong Buy). Rockwell Collins on the other hand retains a Zacks Rank #3 (Hold).
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