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By: Alec Jensen, AIM student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
Astronics Corporation Class B (Pink OTC
Markets: ATROB) supplies products to the aerospace, defense, electronics, and
semiconductor industries. Astronics Corp. has two business segments: Aerospace
(84% of revenue) and Test Systems (16% of revenue).
•
Astronics Corp. recently updated their 2018 revenue guidance and its looks
promising.
•
Management is proactive in positioning themselves for future success in
next-generation aircrafts.
•
The company plans to see higher and more representative sales volumes which
will help with their declining margins.
•
They have seen an increase in their bookings and were chosen by multiple major
airlines to have their products placed inside the aircrafts.
Key points:
Astronics
Corporation has situated themselves nicely for the future despite some obvious
issues that have plagued the company. Being a supplier for the airline industry,
the company faces heavy competition and has a small customer base who make up a
large portion of their revenue. Notably, about 50% of their revenue comes from
their five biggest customers. In the event of losing a customer or having the
rate of new aircrafts/aircraft upgrades decrease, this could prove troublesome
for the company. Also, due to the advancement of technology, this forces
Astronics to be progressive in the development of new technology to stay
competitive.
Fortunately
for Astronics Corporation, these risks have not resulted in a large setback. This
is in part due to the company’s ability to innovate and make products that keep
up with customer’s needs. For example, Astronics doubled their R&D expenses
from around $45 million to $90 million over the past few years. They have
launched new lighting system products as well as an aircraft antenna system. In
addition to innovation within the company, they have made two key acquisitions
this past year. The Custom Control Concepts LLC and Telefonix, Inc.
acquisitions help them break further into the cabin management market and
provide a better product mix.
Looking
at what is expected for 2018, Astronics stated that in Q4 2017 they received
orders of $229 million. This is promising for 2018 sales, which have just been
updated by management to have a midpoint of $780 million. The midpoint sales
number for 2017 is expected to be around $630 million. Therefore, the company
is expecting to see nice sales growth in the coming year. Astronics also aligned
their research and development of new products with the future of aircrafts and
have made deals with six major airlines. These deals bode well for the
company’s growth from next generation aircrafts and their inputs.
What has the stock done
lately?
On
news from management about their updated 2018 guidance, the stock saw a 15%
appreciation as a result. While this appreciation may raise questions regarding
if the stock is fairly valued, ATROB is still 9 dollars under its 52-week high.
With increased expected sales numbers and great bookings, Astronics shares will
likely be priced higher in the coming months.
Past Year Performance: Astronics has experienced an increase of
22.20% in the stock price over the past year. The stock still performed even
with a lower than expected sales number (down 5% from Q3 2016) in 2017 and a decreasing
operating margin to 10%. These lower margins they experienced were rationalized
by management to be from the sales drop in their semi-conductor business, which
normally helps margins.
Source: FactSet
My Takeaway
While
Astronics Corporation hasn’t had the most ideal year for a risk-averse
investor, the stock has still performed and management is continuing to move
the company in the right direction. They have made innovative products and
strategic acquisitions that will prove well for them in the future. Not to
mention, the company just pumped up the hopes of investors and excited them
with their updated guidance for 2018. With the combination of future growth and
awareness/addressing of the company’s risks, I recommend that Astronics
continue to be held in the AIM portfolio.
Source: FactSet
