Expansion In MRO And Automation Will Strengthen Future Efficiency And Market Position

Key Takeaways

• Strategic expansion in MRO services and industrial service offerings is likely to increase revenue in aerospace, power generation, and marine transportation markets.
  
• Automation and operational improvements are expected to enhance efficiency and net margins, supporting long-term earnings growth.
  
• Supply chain challenges, market volatility, and economic uncertainties threaten Woodward's revenue growth, margin stability, and earnings reliability across aerospace, industrial, and defense sectors.

Catalysts

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

• Woodward is prepared for anticipated service growth from LEAP and GTF engines and has expanded its MRO services infrastructure. This is likely to drive an increase in aerospace revenue.
  
• The strategic focus on expanding the industrial service offerings and increasing capacity through facility expansion, notably at the Glatten facility, is expected to enhance revenue in power generation and marine transportation markets.
  
• Operational improvements through automation and supplier simplification are expected to enhance efficiencies, potentially leading to improved net margins.
  
• The company has negotiated new MRO agreements and is positioned to capitalize on strong defense product demand due to geopolitical developments, which may bolster aerospace segment earnings.
  
• Investment in automation and capacity expansion projects aimed at supporting future growth in high-return areas can provide long-term earnings growth and margin expansion.

Woodward Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Woodward's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.2% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $523.8 million (and earnings per share of $8.77) by about December 2027, up from $373.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.5x on those 2027 earnings, down from 27.4x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.2x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.23%, as per the Simply Wall St company report.

Woodward Future Earnings Per Share Growth

Risks

• Woodward faces uncertainty in the aerospace sector due to ongoing supply chain challenges and potential production rate variances at Boeing, which could negatively impact aerospace revenue growth expectations.
  
• The company's exposure to the volatile China On-Highway market, where sales have materially declined due to economic challenges and low visibility into future orders, poses a risk to industrial revenue stability and margin pressure.
  
• There is a risk of compressed margins in Woodward's defense portfolio due to current contracts at legacy pricing levels coupled with supplier price increases, potentially affecting net profit margins in the short term.
  
• Global economic uncertainties, especially in China and fluctuating fuel price spreads, could impact Woodward’s market outlooks in the transportation and industrial segments, potentially affecting earnings predictions.
  
• Persisting industry-wide supply chain disruptions could challenge Woodward’s ability to meet forecasted revenue growth and margin improvements, impacting overall earnings reliability.

Valuation

• The analysts have a consensus price target of $196.11 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 $228.0, and the most bearish reporting a price target of just $151.14.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.9 billion, earnings will come to $523.8 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $172.62, the analyst's price target of $196.11 is 12.0% 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.