The aircraft production cycle is in full swing as Boeing and Airbus build out their fleets of new planes. The major companies involved in this high-revenue effort are in the fund iShares Aerospace/Defense (ITA), but it’s useful to own a few individual companies as well. Today let’s take a look at Goodrich (GR), a leading supplier of components, systems, and services to the commercial aviation and aerospace defense industries. The company is underappreciated and undervalued, so you should learn more about it.
Goodrich sounds like a tire manufacturer but it’s not. It makes aircraft subsystems and provides maintenance services. Its customers include aircraft manufacturers such as Airbus and Boeing (BA), major airlines such as Southwest (LUV) and Delta Airlines (DAL), and the Pentagon.
Its business is divided into three segments: Takeoff and landing systems; electronics, including guidance systems and flight management tools; and interior systems, including nacelles, nozzles, thrusters and part maintenance. The company has the highest or second-highest market shares in products that make up 85% of its sales.
Many airlines put off long term maintenance on engines during the recession, which is a little scary. Now that the economy and air travel begin to show signs of recovery — and oil prices are lower, giving them a price break — airlines are increasing investment and catching up on repairs. Goodrich has invested in many international service facilities that allow the company to expand its global presence in aircraft maintenance. Just last week, Icelandair selected Goodrich to refurbish its nacelles on its Boeing 757 Fleet.
Goodrich is producing many crucial systems for the newest big planes: the Boeing 787 Dreamliner and Airbus A380 and A350. Analysts estimate that these two programs will generate over $20 billion for suppliers over the lifespan of these three projects, and Goodrich’s cut of that will be significant.
The company has also established itself as a leader in advanced aviation defense technology and has developed a close relationship with the American military. One of its key products is the Integrated Vehicle Health Usage and Monitoring System for UH-60 Blackhawks helicopters. This system identifies flaws as they begin to develop so that the operator can fix the problem immediately or plan for maintenance rather than deal with a crisis on the battlefield. The IVHMS system allowed a battalion of Blackhawks to set a new record for the most flight hours in a 12-month period and reduced maintenance costs by over $45 million.
Management has committed to improving operating margins, which have already risen from 6% in 2003 to 14% in 2009. Chief executive Marshall Lerner, a 25-year veteran at the company, earns a compensation package that’s based directly on free cash flow and earnings rather than stock price, directly aligning him with shareholders’ interest.
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Goodrich has acquired over 40 companies in the last 20 years, but executives have said they plan to use excess cash to reduce debt rather than acquire more companies. Goodrich reduced short-term debt from $159 million in 2008 to $4 million in 2009.
Most importantly, the company uses shareholder funds effectively as it boasts a strong return on equity of 19.45%. Revenue is denominated in dollars while much of Goodrich’s operating costs are denominated in euros. As the euro continues to depreciate, Goodrich’s bottom line will benefit.
With a well diversified product portfolio and close customer relationships, it’s poised for at least 10% annual growth for the next few years. My 2011 earnings estimate is $5.39, which puts the forward price/earnings multiple at 13. The stock has typically been afforded a multiple of around 17, so multiply that times $5.39 and you get a $91.50 target for a stock now trading around $68. That makes it a good buy.
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