Margin Challenges And Ultra Energy Integration Will Open SMR Opportunities

Key Takeaways

• Concerns exist over future revenue growth due to naval defense timing challenges and potential disruptions in Defense Electronics.
  
• Acquisition integration and R&D investments may dilute margins, affecting profitability despite growth commitments and anticipated synergies.
  
• Curtiss-Wright's strategic acquisitions and robust order book strengthen its growth prospects, operational performance, and potential for increased profitability and financial stability.

Catalysts

Provides engineered products, solutions, and services mainly to aerospace and defense, commercial power, process, and industrial markets worldwide.

• Despite Curtiss-Wright's strong order book and growing backlog, there are concerns about future revenue growth, particularly in naval defense, which may face timing challenges related to material receipts and submarine program schedules.
  
• Operating margins may be pressured due to unfavorable mix across defense and process markets, as well as potential ongoing disruptions in Defense Electronics stemming from restructuring efforts to support future volume.
  
• The integration of acquisitions such as Ultra Energy carries the risk of initial margin dilution, which may impact the operating margin achievements despite anticipated synergies and growth contributions.
  
• Incremental R&D investments necessary for supporting internally funded development programs and expanding the company's presence in SMR technologies could place pressure on net margins, detracting from overall profitability.
  
• While Curtiss-Wright remains committed to organic growth and margin expansion, uncertainties related to tariffs and macroeconomic conditions may create volatility, impacting revenue streams and profitability forecasts.

Curtiss-Wright Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Curtiss-Wright compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Curtiss-Wright's revenue will grow by 6.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.4% today to 14.5% in 3 years time.
• The bearish analysts expect earnings to reach $565.9 million (and earnings per share of $14.98) by about July 2028, up from $429.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.5x on those 2028 earnings, down from 42.1x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 35.1x.
• Analysts expect the number of shares outstanding to decline by 1.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Curtiss-Wright Future Earnings Per Share Growth

Risks

• Curtiss-Wright's record financial performance in 2024, including double-digit growth in sales and operating income, suggests a strong demand within its core portfolio, which could support revenue and earnings growth.
  
• The acquisition of Ultra Energy is expected to enhance Curtiss-Wright’s commercial nuclear portfolio, which is anticipated to drive future margin accretion and revenue growth as Ultra Energy is integrated into operations.
  
• Strong free cash flow of $483 million and healthy cash flow conversion rates indicate robust operational performance and financial stability, which could positively impact net margins and earnings.
  
• The significant increase in the order book, which reached a new record of $3.7 billion, provides additional confidence in long-term growth outlook, potentially contributing to revenue and earnings growth.
  
• Curtiss-Wright's expectation of achieving 18% operating margin in 2025 at the midpoint of their guidance, driven by operational excellence and margin expansion efforts, suggests continued profitability and net margin improvement.

Valuation

• The assumed bearish price target for Curtiss-Wright is $308.11, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Curtiss-Wright's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $570.0, and the most bearish reporting a price target of just $308.11.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $565.9 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of $479.67, the bearish analyst price target of $308.11 is 55.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.