Esterline Tech's Primary Growth Avenues

By Ryan C. Fuhrmann | March 07, 2012 AAA

Defense and aerospace firm Esterline Technologies (NYSE:ESL) reported great sales growth during its first quarter, though this was due to the purchase of a French rival. Profit growth lagged, but management has ambitious expansion targets over the long haul. Recent trends could make meeting these goals difficult, but it's hard to argue with the company's track record and aerospace exposure could easily offset challenging defense industry trends.

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First Quarter Recap
Sales advanced 27% to $470.9 million. Two of Esterline's three divisions reported top line growth. The sensors and systems segment, which sells sensors such as the temperature probes used on the General Electric's (NYSE:GE) CFM-56 jet engine, saw sales more than double to $171.7 million, or 36.5% of total sales. This was due in good part to the purchase of French connector firm Souriau. Advanced materials jumped 18.1% to $119.6 million (25.4% of sales) and sells engineered products, such as silicone rubber, to large customers including Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT). The avionics and control unit was the only laggard and reported negative sales growth of 6.7% to $179.6 million, or the remaining 38.1% of sales. This division sells products such as systems that help integrate avionic cockpits, with major customers including Boeing again, but also Honeywell (NYSE:HON).

In terms of operating profit growth, two of the three units reported declines. Advanced materials reported an impressive 51.2% growth to $23 million for an operating margin of about 19.3%. Avionics and controls reported a 35.3% plummet to $20.1 million for a margin of 11.2%. Sensors and systems saw profits fall 37.9% to only $6.8 million and margins just below 4%.

Backing out corporate overhead and interest expense, pre-tax income fell 32.1% to $25.6 million. Net income fell 24% to $22.8 million, or 73 cents per diluted share, though management detailed this included one-time acquisition charges of 25 cents. Excluding this charge and earnings grew about a penny. To know more about income statements, read Understanding The Income Statement.

Outlook
The full year sales expectation is just over $2 billion for annual growth close to 20%. Acquisitions will again account for most of the increase. The earnings consensus projection for 2012 is $5.27 per share, or year over year growth in excess of 23%.

The Bottom Line
For the most recent full year, Esterline's free cash flow came in at about $143 million, or $4.58 per diluted share. This puts the trailing free cash flow multiple at about 13, though the forward price to earnings ratio is more reasonable at around 11. However, as with most firms operating in the defense industry, future growth trends are going to be much more challenging.

Esterline's business is equally divided between aerospace and defense. As such, its aerospace unit should be able to offset any anemic defense growth. Geographically, half of its business stems from outside of the U.S. and provides another solid growth avenue. Management has a goal to grow organically between 7 and 9% annually. It would also like to acquire between 7 and 9% in annual growth, and though the combined target currently looks aggressive, it has managed to grow sales close to 17% annually over the past decade. It also boasts an equal annual earnings growth rate since 2005. For additional reading, check out 5 Must-Have Metrics For Value Investors.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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