Acquisition Of Safran's Actuation Business Will Expand Presence On Airbus A350

Key Takeaways

• Strategic acquisitions and divestitures are poised to enhance technological capabilities and focus on high-margin products, potentially improving revenue and profitability.
  
• Investments in automation and lean transformation are expected to improve production efficiency, supporting stable operations and enhancing net margins.
  
• Post-COVID supply chain challenges, struggling suppliers, and economic conditions in China could hinder Woodward's production, revenue, and earnings across sectors.

Catalysts

Designs, manufactures, and services control solutions for the aerospace and industrial markets worldwide.

• Woodward's strategic acquisition of Safran's Electronics & Defense electromechanical actuation business is expected to bolster technological capabilities and increase shipset content on the Airbus A350, potentially driving revenue growth.
  
• Investments in automation and lean transformation are anticipated to improve production efficiency, contributing to stable operations, which could enhance net margins.
  
• The divestiture of low-value industrial segments allows Woodward to focus on high-margin core industrial products, potentially improving profitability and net earnings.
  
• The robust demand in markets such as gas-fired power generation and marine transportation is expected to support revenue growth in the industrial segment.
  
• Ongoing cash flow management and shareholder returns through dividends and share repurchases are expected to support earnings per share (EPS) growth, enhancing shareholder value.

Woodward Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Woodward's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.2% today to 12.7% in 3 years time.
• Analysts expect earnings to reach $494.5 million (and earnings per share of $8.34) by about March 2028, up from $370.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $571.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.1x on those 2028 earnings, down from 29.6x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.2x.
• Analysts expect the number of shares outstanding to decline by 2.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.55%, as per the Simply Wall St company report.

Woodward Future Earnings Per Share Growth

Risks

• Woodward is still dealing with post-COVID supply chain challenges, which could impact their production rates and ability to meet demand. This can affect revenue as well as margins due to additional costs from insourcing or handling inefficiencies.
  
• The $65 million year-over-year decline in China on-highway sales significantly affected the Industrial segment's performance, which could continue to pressurize revenues if the economic conditions in China don't improve.
  
• The reliance on suppliers that are currently struggling with output and quality poses a risk to meeting the increased demand signal, potentially leading to constrained revenue growth or reduced earnings due to supply chain bottlenecks.
  
• The profitability of the Industrial segment is also impacted due to unfavorable mix and lower volumes, seen from the significant decline in China on-highway sales and the margins being partially offset by price realization.
  
• There are still concerns regarding Boeing's restart of production and the timing of returning to growth in the second quarter. Any further delays or issues could result in lower-than-expected commercial OEM revenue growth, thereby impacting overall earnings.

Valuation

• The analysts have a consensus price target of $205.134 for Woodward based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $232.0, and the most bearish reporting a price target of just $167.34.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $494.5 million, and it would be trading on a PE ratio of 27.1x, assuming you use a discount rate of 6.6%.
• Given the current share price of $184.74, the analyst price target of $205.13 is 9.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.