Curtiss-Wright
Corporation (CW, $155.56): “The ‘Wright’ Decisions Paying Off”
By: Michael
O’Donnell, AIM Student at Marquette University
Disclosure:
The AIM Small-Cap 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
- Curtiss-Wright Corporation
(NYSE: CW) is a precision manufacturer of components that
provide solutions to the commercial/industrial, defense, and nuclear power
generation markets. Products across segments include transmission
shifters, electro-mechanical actuation control components, turret aiming
and stabilization products, airlock hatches, etc. Of CW’s FY ’21 revenues,
74.1% were derived in the US. CW is headquartered in Davidson, NC.
- CW’s
revenue grew 4.79%, YoY, due to a 19% increase in their Defense
Electronics segment.
- Operating
Margin increased 320-bps, YoY, showing execution of restructuring and
operational initiatives which enabled management to invest an incremental
$14m in R&D.
- CW repurchased
a record $350m of shares outstanding which contributed to a 37% increase
in diluted EPS, YoY.
- In
January of 2022, CW announced the acquisition of Safran’s arresting business
for $240m cash. The arresting business is a supplier of mission-critical,
fixed-wing military aircraft arresting systems. In that same month CW
divested Phönix Group, their German valves business, because of a lack of
synergies recognized.
- CW’s
growth prospects look promising considering geopolitical tensions and
growing government defense spending.
Key
points:
When CW announced FY ‘21 earnings
on February 24, investors were impressed. In the week ensuing CW’s earnings,
share price rose 13.79%. Throughout 2021, CW beat EPS and revenue estimates
(excluding Q4 ’21 revenue missing by 1.22%). For FY ’21, revenues grew 4.79%,
YoY, primarily from their 19% increase in their Defense Electronics segment. This
demonstrates CW’s continuing ability to align product offerings with government
spending.
Arguably what impressed investors
most was CW’s ability to expand margins. In FY ’21, operating margins expanded
320-bps. This jump can be attributed to CW’s FY ’20 restructuring initiatives.
These initiatives set to identify any administrative inefficiencies that
hampered margins. Paired with this was operational initiatives that set to do
the same on the manufacturing side. Because of the success of these initiatives
management invested an incremental $14m in R&D which should pay dividends
in future growth opportunities.
CW has consistently bought back
shares. In FY ’20, CW repurchased $200m in shares. In FY ’21, that number grew
to $300m which is $50m more than what CW had initially announced. Ultimately
this share buyback program has contributed to shareholders seeing a 37%
increase in diluted EPS, YoY.
January 2022 was an active month
for CW. In this month they announced the acquisition of Safran’s arresting
systems business for $240m cash which is expected to close in Q3 of FY ’22. This
acquisition will expand their global defense portfolio and is projected to be
accretive to EPS in year one. Also, in this month CW chose to divest Phönix
Group, their German valves business. Phönix was acquired in 2013 and divested
because of the inability to recognize anticipated synergies regardless of time
and resources contributed.
What
has the stock done lately?
Since earnings were released CW
has been trading in the $152 area. This excludes the share price downturn to
$145.23 on March 16.
Past
Year Performance:
Currently CW is trading at
$155.56. Over the past 52 weeks, CW has ranged from $112.11 - $155.88.
My
Takeaway
When CW was pitched in Fall of
2020, the price target was $133.35. While CW currently exceeds that value, I
believe that there is still a lot of potential and growth opportunities. In May
2021, the federal government announced that 2022 defense spending would be $715
billion, a 1.6% YoY increase. Because of Russia’s invasion of Ukraine many
countries are revaluating their defense spending. There have been reports that the
US could increase the 2023 defense budget to $780 billion.
