While riding my bike through beautiful Ft. Collins, CO, I spotted a massive corporate and manufacturing building complex. Upon further investigation, it turned out to be the corporate headquarters of 150-year-old aerospace and industrial company Woodward (NASDAQ:WWD). I used to follow the company back when they were called Woodward Governor, and decided to take a closer look at WWD stock.
Woodward designs and manufactures control system solutions and components for the aerospace and industrial markets. Its offerings include fuel pumps, engine controls and turbines.
It operates in two segments – aerospace and industrial. On the industrial side, the company makes products for the management of fuel, air, gases, electricity and combustion.
Key Investment Points for WWD Stock
According to an investor presentation from the company, Woodward expects future growth from the worldwide expansion of the aviation market. It also predicts a boost from the strong push for energy efficiency across most industrial companies.
Woodward has produced steady financial results — with the exception of 2020’s Covid driven aviation and energy declines.
Free cash flow remains a hallmark of the company’s business model. Woodward is able to reinvest the cash in opportunistic acquisitions, dividend growth and share buybacks. The strong free cash flow has enabled it to keep its leverage ratios relatively low, usually around 2x.
The company has somewhat of a competitive moat, as the certifications required to operate in the highly regulated aviation business are often hard to achieve. This is also true in many of their regulated energy related businesses.
On the aerospace side, the company’s revenue is about 40% after-market, providing a steady recurring revenue stream. The business is roughly split evenly between commercial aircraft and defense-related aircraft.
An Encouraging Update From Woodward
As stated in Woodward’s third-quarter earnings call, the commercial aerospace market has begun to recover as many airlines begin to reactivate parked fleets. U.S. air travel is moving toward pre-Covid levels, but international air travel is still weak.
Delta variant fears may cause short-term hiccups in this growth trajectory. But regardless of Covid’s effects, this commercial air fleet uses a lot of Woodward’s advanced technology and components. This provides a source of strong after-market growth for the company.
On the industrial side, particularly in power generation, demand is increasing. Sector growth in Asia as well as the widespread replacement of coal-powered plants are expected to drive this increase into 2022. The company expects after-market activity to return to pre-Covid levels at some point next year.
An interesting growth sub-segment for Woodward is back-up power generation for data centers and cloud-based operations. Other customer segments that are showing positive signs include the natural gas truck, marine and oil markets.
The company is on track to return 50% of net earnings to shareholders in the form of dividends or share repurchases. The remainder is likely to be used for mergers and acquisitions. The company expects to continue to generate strong levels of free cash flow as it has historically.
WWD Stock Is a Great Long-Term Pick
WWD stock has had a nice run since the 2008 financial crisis. It has risen more than 10-fold since then and shown decent recovery from the Covid-19 crash, increasing by more than 100%.
The stock is not currently cheap, as it trades at 30 times 2022 consensus EPS, which may be a full recovery year.
The dividend yield is only 0.55% largely due to the high stock price and low payout ratio of 14.73%. The company has not repurchased shares in the nine-month period ending June 30, which appears to be a sensible move.
When the meme and day-trading trends fade away, investors will be looking for companies like this. Real earnings! Real free cash flow! Solid returns on capital and equity! Low debt ratios! WWD stock has all of these attributes, and I believe it will be in high demand in the not-so-distant future.
Alternatively, quality mid-cap companies like Woodward, with a market cap of only $7.4 billion, would make a nice bite-sized acquisition for larger aerospace and industrial companies. Either way, investors in WWD stock would benefit in the end.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.