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Woodward (WWD) Up 7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Woodward (WWD). Shares have added about 7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Woodward due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Woodward Q3 Earnings Miss Estimates, Revenues Up Y/Y

Woodward reported decent third-quarter fiscal 2021 results with net earnings and sales increasing on a year-over-year basis. The rise was driven by improving market conditions, strength across the aerospace segment resulting from recovering passenger traffic and effective working capital management along with solid defense original equipment manufacturer (OEM), commercial OEM and aftermarket sales.

However, both the bottom line and top line lagged their respective Zacks Consensus Estimate. Despite the global economic upswing, macroeconomic uncertainties, weak industrial segment sales, regional market volatility and supply chain disruptions stemming from the pandemic continue to hamper Woodward’s business.

Net Income

On a GAAP basis, net earnings in the quarter were $48.9 million or 74 cents per share compared with $38.5 million or 61 cents per share in the year-ago quarter. The year-over-year improvement in earnings was primarily driven by top-line expansion.

Adjusted net earnings came in at $48.9 million or 74 cents per share compared with $30.7 million or 48 cents per share in the year-earlier quarter. The bottom line missed the Zacks Consensus Estimate by 25 cents.

Revenues

Net sales in the fiscal third quarter jumped 6.3% year over year to $556.7 million due to higher sales in the Aerospace segment. However, it was negatively impacted by nearly $30 million on account of delayed orders and global supply chain disruptions, mainly hampering the aerospace business. Apart from COVID hardships, regional market volatility acted as a major headwind. Commercial OEM and aftermarket sales improved on a year-over-year basis, thanks to increasing aircraft build rates and recovering domestic passenger traffic. Defense OEM sales were up 5% year over year on the back of solid order volume and backlog. However, the company expects guided weapons volume to considerably fall in fiscal 2022. With businesses picking up pace despite the lingering COVID-19 impact, factors such as increasing crude prices and demand for energy have boosted the global oil and gas markets, thereby accelerating investments. The top line lagged the consensus estimate of $623 million.

Segment Results

Aerospace: Net sales were up 11.2% year over year to $340.9 million led by higher commercial OEM and aftermarket sales resulting from improving passenger traffic. Favorable defense spending along with aircraft utilization and upgrade programs aided the segment’s quarterly results amid the global turmoil. Positive indicators such as Boeing 737 MAX’s service recovery across key markets and gradual increase in aircraft production rates are expected to boost the segment’s revenues in the upcoming quarters. The segment’s earnings were $53.2 million, up from $41.1 million in the year-ago quarter driven by higher sales volume in commercial OEM.

Industrial: Net sales totaled $215.8 million, down 0.7% year over year due to the impact of global supply chain constraints stemming from the pandemic accompanied by weakness in China natural gas engines. The China V diesel truck pre-buy dampened natural gas engine sales. Excluding the divestiture of renewable power systems and related businesses, favorable forex enhanced the segment’s profitability. Investments are expected to increase with gradual improvement in global oil demand and increasing prices. Encouraged by robust demand for gas turbine and backup power for data centers, marine market witnessed improved ship utilization. This, in turn, propelled aftermarket activity. The segment’s earnings were $27.2 million, down from $27.4 million in the year-ago quarter.

Other Details

Total costs and expenses increased to $498 million from $478.8 million a year ago. Adjusted EBITDA came in at $99 million compared with $83.7 million in the year-ago quarter.

Cash Flow & Liquidity

In the first nine months of fiscal 2021, Woodward generated $317.9 million of net cash from operating activities compared with $212.4 million a year ago. Free cash flow for the same period came in at $296.6 million compared with $173.3 million a year ago, driven by lower capital expenditures and effective working capital management. As of Jun 30, 2021, the company had $362 million in cash and cash equivalents with $739.1 million of long-term debt (less current portion).

Outlook Withheld

Due to lack of visibility amid economic disruptions stemming from the coronavirus-induced turmoil, including supply chain challenges and regional market fluctuations, Woodward refrained from providing guidance for fiscal 2021. However, the company expects sales, earnings and free cash flow results for the fourth quarter to be higher sequentially supported by a resilient business model and healthy balance sheet position. Woodward remains focused on leveraging its operational structure and optimized working capital to tap on growth opportunities and return to pre-COVID capital allocation strategy to enhance long-term shareholder value.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -22.66% due to these changes.

VGM Scores

Currently, Woodward has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Woodward has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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