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Woodward Focuses on Diversifying Revenue Source, Risks Stay

Zacks Equity Research

On Dec 28, we issued an updated research report on Woodward, Inc. WWD.

The control solutions provider for the aerospace and industrial market has been investing significantly in technologies to secure new businesses. It is spending on manufacturing units and automation equipment to perk up efficiency as the company intends to accelerate production. Woodward is focusing on diversifying its revenue stream. Its plan to become a systems integrator has increased contract flow substantially, enabling it to capture a larger market share in the wide-body commercial aircraft field.

The commercial aerospace market is expanding, driven by record passenger, cargo traffic and elevated load factors. Increased production in this space has been observed as aircraft operators continue to take delivery of new aircraft models that are more fuel efficient. The company is also witnessing growth in defense sales, driven by strong demand for smart weapons due to global uncertainty resulting in increased global defense spending.

Woodward’s Aerospace business continues to perform well with production increases in the Airbus A320neo and Boeing 737 MAX driving significant growth in commercial OEM sales. Momentum within its defense OEM business also remains strong, supported by guided weapon sales as well as fixed-wing, rotorcraft and ground programs. The company believes that, in Aerospace business, TRAS systems for the Airbus A320neo, A330neo, Boeing 777X and fuel system for the GE9x are key program investments among others that will drive future growth. In Industrial segment, China VI compliant natural gas engine systems, new emission compliant diesel engine systems and new power converters on next-generation wind turbines are also expected to fuel growth.

Further, to expand its footprint in the OEM market, the company acquired L’Orange — a supplier of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel — in June 2018. The buyout has enhanced Woodward’s product portfolio as well as extended its presence in key end markets. It has proven to be a strong fit within the company’s Industrial segment with solid technology platform and large installed base. The buyout is also likely to be significantly accretive to its fiscal 2019 results.

On the back of well-execution of strategic plans, the company expects total net sales of $2.65-$2.8 billion for fiscal 2019 with 10% and 30% rise in Aerospace and Industrial sales, respectively, year over year. While adjusted earnings per share are projected to be between $4.40 and $4.70, based on nearly 65 million outstanding shares, free cash flow is expected to be around $300 million.

The stock has gained 42.7% compared with 14.9% growth recorded by the industry in the past three years.



Risks

Within power generation market, Woodward is witnessing demand-related challenges in the industrial gas and turbine market as well as a drop in volume tied to renewables penetration and greater energy efficiency. The weakness in the company’s renewables business is due to the short-term unfavorable impact of platform transitions by some of its customers. With no notable improvement expected in these aspects before 2020, Woodward is expected to perform poorly in the power generation front.

Woodward has significant presence in the commercial aerospace market, which is cyclical in nature. It faces intense competition from a number of major players in the United States and abroad. Changes in competitive conditions, including factors like the availability of new products and services, introduction of new channels of distribution and changes in OEM and aftermarket pricing will likely hamper its association with clients and affect sales. Woodward caters to fewer customers than many companies with similar sales volumes. Any loss of its significant customer will have a material impact on the company’s operational performance.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock.

Stocks to Consider

A few stocks in the broader industry worth considering are Allied Motion Technologies Inc. AMOT, Badger Meter, Inc. BMI and Arista Networks, Inc. ANET, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.         

Allied Motion has a long-term earnings growth expectation of 10%.

Badger Meter has a long-term earnings growth expectation of 9%.

Arista has a long-term earnings growth expectation of 21.7%.

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