Investor's Business Daily, August 22nd, 2007
Aerospace company Esterline Technologies has another feather in its cap.
Usually a niche player that provides smaller parts to the aviation industry, Esterline recently scored big as a provider of the overhead panel for the newly launched 787 Boeing aircraft.
"Historically, a lot of their revenue is tied to small components. They are more niche players," said Peter Arment, analyst at JSA Research. "This (project) puts them on a tier-one level as a supplier."
In its second fiscal quarter of 2007 ended in April, Esterline ESL shipped its first flight-ready overhead panel for the Boeing 787.
In a recent conference call with analysts, Esterline CEO Robert Cremin said upside from this deal is yet to come as Boeing has more than 565 committed orders in their backlog without counting a recent Russian order.
"Our Seattle avionics plant really achieved a milestone this quarter," Cremin said.
Three Divisions
Esterline has three aerospace and defense business segments: Avionics & Controls, Sensors & Systems and Advanced Materials.
The Avionics & Controls unit makes switches, indicators, keyboards and displays for aircraft and military vehicles, communication systems and medical equipment.
Sensors & Systems operations include temperature and pressure sensors and fluid and motion control products. The Advanced Materials segment makes elastomer products, plus ordnance and military counter-measures.
Esterline Defense Group -- a unit of Esterline Technologies -- makes ordnance products, including mortar propellant containers and tank combustible cartridge casings. It also makes countermeasure systems such as chaff, which fools radar, and flares, which draw off heat-seeking missiles.
The company, which used to be known as Armtec Defense Products, has facilities in Arkansas, California, North Carolina and Tennessee.
Esterline's second-quarter sales were up 26% to $312 million while earnings per share grew 12% to 76 cents a share.
Although the 787 Boeing deal doesn't yet figure in Esterline's results, other segments are moving the ball forward.
Its backlog at the end of the quarter totaled $954 million, including $252 million from recently purchased CMC Electronics. The backlog, an indicator of the company's future business, includes only fully funded orders with firm release dates. Even without CMC's contribution, Esterline's backlog grew 11% compared with last year.
Analyst Robert Toomey of E.K. Riley says the company has solid financials for a number of reasons. One is the restructuring of the past few years that turned Esterline into a streamlined aerospace company. Esterline had its hand in 10 separate industries in the late 1990s. Then it shed all of its outside businesses within five years.
"You have to give a lot of credit to Bob Cremin in engineering a strategic focus for the company," Toomey said.
Cremin's plan includes several acquisitions that have added significant revenue growth to Esterline. In March, Esterline bought CMC Electronics, a maker of high-tech products such as global positioning, enhanced vision and flight management systems. CMC added $30 million to the top line.
Even with this acquired growth in the mix, Cremin says, Esterline is enjoying robust organic growth. For the second quarter, organic sales growth was 13% and year to date it's 15%.
Working in Esterline's favor is an upswing in the aerospace and airline industry, Toomey says. With many of the major airline carriers making substantial strides on the runway to recovery following a long struggle since the Sept. 11 terrorist attacks, orders for new aircraft and components are ticking up. Older aircraft also need new parts and upgrades.
Another obvious boost to Esterline's business is growing government defense spending. With no end in sight for military action in Iraq and Afghanistan, Esterline sees long-term revenue pluses for its defense projects.
"The hostile weather in Iraq and Afghanistan really eats up the equipment, and we see benefits from reset programs going out through at least 2009 or even 2010," Cremin said.
With so much revenue potential riding on defense and aerospace -- 80% of its revenue comes from these industries -- Esterline faces a risk should plans change on the battlefield. Analysts admit this is a risk, but say chances are minimal of a dramatic drop in defense spending.
"There's no question (Esterline's revenue) is tied to defense spending through its sensors and other small control components that are found on every aircraft," Arment said. "But at the end of the day, no presidential candidate is talking about a decrease in defense spending."
Then there's the cyclical nature of the aerospace and airline industry.
"A large part of their growth comes from acquisitions, and this comes at a risk," Toomey said. "For the most part they have turned out well for Esterline, but sometimes they don't turn out as expected, and as they move up the supply chain they take on more risk in managing the production of larger systems."
Competitors
Esterline's rivals include larger players such as Ametek AME. The Paoli, Pa.-based company derives most of its sales from making monitoring, calibration and display devices for the aerospace industry. It had 2006 sales of $1.8 billion.
Another competitor is Cleveland-based Eaton ETN, whose product line includes electrical power distribution and control equipment, engine components and hydraulic and fluid power products for aerospace, automotive and other industrial uses. Last year, it had sales of $12.3billion.
Charlotte, N.C.-based Goodrich GR, formerly a tire maker, is focused on its three aerospace divisions. It posted $5.9 billion in sales in 2006.
With 2006 revenue of $972 million, Esterline clearly is a small fish in a big pond, despite its recent coup with the 787 Boeing deal. Its continued focus on niche businesses is what analysts say will keep the company on the right track and off the radar of larger companies.
"That's another reason to give Cremin credit," Toomey said. "He really stays in niches and doesn't go head-to-head with the Goliaths of the industry."
Thomson Financial analysts expect Esterline to end fiscal 2007 with $2.60 a share, 21% above last year.
They see the company boosting earnings 20% in 2008 to $3.13 a share.
