While cycling through the magnificent Fort. Collins, CO, I spotted a huge complex of corporate and manufacturing buildings. Upon further investigation, it turned out to be the headquarters of a 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 the actions of WWD.
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 manufactures products for the management of fuel, air, gas, electricity and combustion.
Key investment points for WWD Stock
According to a presentation to investors of the company, Woodward expects future growth in the global expansion of the aviation market. He also predicts a strong push for energy efficiency in most industrial companies.
Woodward delivered stable financial results – except for the aviation and energy declines caused by Covid in 2020.
Free cash flow remains a feature of the business model of the company. Woodward is able to reinvest the money in opportunistic acquisitions, dividend growth and share buybacks. The strong free cash flow allowed it to keep its leverage ratios relatively low, generally around 2x.
The company has somewhat of a competitive divide, as the certifications required to operate in the highly regulated aviation industry are often difficult to obtain. This is also true in many of their regulated energy-related activities.
On the aerospace side, the company’s turnover is around 40% aftermarket, which represents a recurring and constant revenue stream. Activity is roughly evenly split between commercial aircraft and defense-related aircraft.
An encouraging update from Woodward
As noted in Woodward’s third quarter earnings call, the commercial aerospace market has started to recover as many airlines begin to reactivate parked fleets. Air travel to the United States is approaching pre-Covid levels, but international air travel is still low.
Fears of the delta variant may cause short-term hiccups in this growth path. But whatever the effects of Covid, this commercial airline fleet uses a lot of Woodward’s cutting-edge technology and components. This constitutes a source of strong after-sales growth for the company.
On the industrial side, especially in the production of electricity, demand is increasing. Industry growth in Asia along with the widespread replacement of coal-fired power plants is expected to drive this increase through 2022. The company expects aftermarket activity to return to pre-Covid levels at some point l ‘next year.
An interesting growth sub-segment for Woodward is standby power generation for data centers and cloud-based operations. Other customer segments showing positive signs include the natural gas truck, marine and petroleum markets.
The company is on track to return 50% of its net profit to shareholders in the form of dividends or share buybacks. The rest is likely to be used for mergers and acquisitions. The company expects to continue to generate high levels of free cash flow, as it has in the past.
WWD Stock is a great long term choice
WWD stock has had a strong run since the 2008 financial crisis. It has grown more than 10-fold since then and has shown a decent recovery from the Covid-19 crash, increasing by over 100%.
The stock is currently not cheap, as it is trading at 30 times consensus 2022 EPS, which could be a year of full recovery.
The dividend yield is only 0.55%, largely due to the high stock price and the low payout ratio of 14.73%. The company did not repurchase any shares in the nine-month period ending June 30, which seems like a sensible move.
When the meme and day-trading trends fade, investors will seek out companies like this. Real gains! Real free cash flow! Strong returns on capital and equity! Low debt ratio! WWD stock has all of these attributes, and I think it will be in high demand in the not-so-distant future.
Alternatively, quality mid-cap companies like Woodward, with a market cap of just $ 7.4 billion, would make a nice small-sized acquisition for large aerospace and industrial companies. Either way, WWD stock investors would benefit in the end.
As of the publication date, Tom Kerr does not hold a position in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Tom Kerr has worked in the financial services industry for over 25 years. He is currently a Senior Portfolio Manager at Rocky Peak Capital Management. Previously, he was Director of Investments and Director of Research of SGL Investment Advisors, and held several positions in other organizations related to finance. Mr. Kerr also contributed to the writing of La Rue.com, RagingBull.com and InvestorPlace.com. He is a CFA charter holder and earned a BBA in finance from Texas Tech University.