Secured Pricing Contracts And Defense Momentum Will Drive Future Opportunities

Key Takeaways

• Anticipated revenue boost from defense sector contracts and backlog, improved by operational enhancements for increased free cash flow and net margins.
  
• Strategic focus on innovation and defense priorities, mitigating tariff impacts, supports organic growth and long-term revenue opportunities.
  
• Moog faces potential financial risks from trade policy uncertainty, supply chain complexities, defense budget fluctuations, and changes in customer ordering patterns.

Catalysts

Designs, manufactures, and integrates precision motion and fluid controls and controls systems for original equipment manufacturers and end users in the aerospace, defense, and industrial markets in the United States, Germany, and internationally.

• Moog expects increased revenue in the second half of the fiscal year, driven by defense sector growth due to secured pricing contracts and a strong 12-month backlog, reflecting positively on future revenue.
  
• Operational improvements and optimization of net working capital are expected to generate significant free cash flow in the later part of the year, enhancing net margins.
  
• Strategic initiatives to mitigate tariff impacts, including leveraging trade agreements and adjusting pricing, are likely to preserve earnings despite potential tariff risks, affecting net margins and earnings stability.
  
• Continued investment in innovation and high-performance products such as the next-generation CURLIN 8000 infusion pump and propulsion systems for space applications highlights strong potential for organic growth, impacting future revenue streams.
  
• Increased international defense spending and alignment with key defense priorities, such as sixth-generation fighter aircraft, suggest long-term revenue growth opportunities.

Moog Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Moog's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 9.0% in 3 years time.
• Analysts expect earnings to reach $379.3 million (and earnings per share of $10.4) by about May 2028, up from $208.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 26.8x 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 1.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Moog Future Earnings Per Share Growth

Risks

• The uncertainty surrounding trade policies and new tariffs on steel, aluminum, and imports from multiple countries could increase costs and impact Moog's manufacturing efficiency and supply chain, potentially affecting net margins and earnings.
  
• While Moog is confident about mitigating tariff impacts using agreements like USMCA and adjusting pricing, any future retaliatory tariffs, trade escalations, or supply chain disruptions remain unpredictable and could pose risks to revenue and profits.
  
• Moog's reliance on complex global supply chains, including investments in facilities in countries like Costa Rica and Mexico, exposes the company to fluctuating tariffs and potential disruptions, which could impede operational efficiency and profitability.
  
• Uncertainties in Commercial Aircraft segment's OE sales due to ordering pattern changes from major customers like Airbus could impact revenue projections and working capital management, affecting free cash flow and earnings.
  
• Potential bankstiffness in the defense budget, impacted by broader economic pressures or governmental changes, could misalign with Moog's longer-term investment and growth strategies in the defense sector, posing risks to future revenue growth.

Valuation

• The analysts have a consensus price target of $213.75 for Moog based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $379.3 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 7.1%.
• Given the current share price of $177.09, the analyst price target of $213.75 is 17.2% 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.