Aerospace Improvements And Smart Defense Updates Will Secure Future Success

Key Takeaways

• Record aerospace sales and lean improvements suggest revenue growth and margin enhancement potential.
  
• Advancements in defense and industrial sectors signal increased revenue and earnings growth opportunities.
  
• Trade tensions, softer demand, and operational risks could impact Woodward's sales, margins, and revenue across aerospace and industrial segments.

Catalysts

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

• Significant improvement in aerospace plant performance, including record sales and operational efficiencies from lean transformations, indicates potential revenue growth and margin improvement.
  
• Growth in fuel shipments and maintenance cycles for products like LEAP and GTF, with LRU inputs and return shipments doubling, suggests future revenue increases in aerospace aftermarket services.
  
• Progress in the smart defense segment and the ability to align production rates to customer demand are expected to drive defense OE revenue growth.
  
• Achievements within the industrial sector, particularly a 20% to 50% increase in gas turbine systems output through lean transformations and equipment enhancements, suggest potential earnings growth and improved net margins.
  
• The new MicroNet XT system for military applications represents a promising revenue stream, given long-term contracts with the Navy, which could positively impact future earnings and free cash flow.

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 11.4% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $513.1 million (and earnings per share of $8.56) by about May 2028, up from $381.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $581.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, down from 30.6x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 2.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Woodward Future Earnings Per Share Growth

Risks

• Trade tensions between the U.S. and China could exacerbate sales risks, particularly with already observed reductions in sales orders for spare parts and potential decreases in fleet utilization, impacting revenue.
  
• There is a risk of commercial aftermarket sales growth moderating in the second half of the year due to softer demand from China and U.S. customers deferring their spare part orders, potentially impacting margins and earnings.
  
• Potential tariff increases pose a risk to Woodward's operational costs and supply chain stability, even with regional production strategies, which could affect net margins and earnings.
  
• The decline in commercial OEM sales due to Boeing work stoppage and potential shifts in production rates could disrupt revenue growth in the aerospace segment.
  
• Prolonged downturn in the China on-highway market and possible reductions in global shipping due to trade tensions could adversely affect the industrial segment's revenue and profitability.

Valuation

• The analysts have a consensus price target of $205.234 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 $229.0, 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 $4.0 billion, earnings will come to $513.1 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $196.08, the analyst price target of $205.23 is 4.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.