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Key Takeaways
- Strategic expansions into commercial nuclear markets and investments in defense electronics hint at significant long-term revenue growth.
- Operational efficiencies and restructuring initiatives across sectors are set to improve net margins and operating income.
- Curtiss-Wright's future revenue and operating margins face uncertainty due to reliance on defense spending, supply chain vulnerabilities, and integration of acquisitions.
Catalysts
About Curtiss-Wright- Provides engineered products, solutions, and services mainly to aerospace and defense, commercial power, process, and industrial markets worldwide.
- Strong demand and growth in defense electronics, including ground defense and C5ISR programs, point to potential market share gains and sustained revenue growth.
- The acquisition of Ultra Energy is expected to expand Curtiss-Wright's presence in commercial nuclear markets and small modular reactors, likely leading to long-term revenue growth.
- Restructuring and cost-saving initiatives across all segments, particularly in Aerospace & Industrial, are projected to lead to operating income improvements and contribute to net margin expansion.
- The diversification into commercial nuclear aftermarket through acquisitions and strategic investments in R&D for long-term projects like subsea pumps indicate potential for significant revenue streams.
- Enhanced operational efficiency and the pursuit of operating margin expansion, including benefits from legal entity consolidation in the UK, aim to positively impact net margins and earnings.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Curtiss-Wright's revenue will grow by 5.5% annually over the next 3 years.
- Analysts assume that profit margins will shrink from 13.1% today to 0.1% in 3 years time.
- Analysts expect earnings to reach $482.5 million (and earnings per share of $12.73) by about August 2027, up from $392.6 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 29.2x on those 2027 earnings, down from 29.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 33.4x.
- Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 6.0%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- Dependence on defense spending and foreign military sales which, despite current strength, may face future uncertainties or reductions impacting revenue.
- Risk of project delays or cancellations in the Defense Electronics and Naval & Power segment could result in lower-than-expected revenues.
- Supply chain disruptions, while currently managed, could re-emerge, especially for legacy components, leading to increased costs or delayed deliveries impacting operating margins.
- R&D investments, though necessary for long-term growth, may pressure near-term operating margins if not managed within expected returns.
- Execution risks associated with integrating recent acquisitions like Ultra Energy, which could temporarily dilute operating margins or distract management from core operations.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $311.8 for Curtiss-Wright 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 $334.0, and the most bearish reporting a price target of just $270.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.5 billion, earnings will come to $482.5 million, and it would be trading on a PE ratio of 29.2x, assuming you use a discount rate of 6.0%.
- Given the current share price of $304.17, the analyst's price target of $311.8 is 2.4% 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.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.