My recommendation for Woodward (NASDAQ:WWD) is a buy rating, as 1Q24 margin performance was better than I expected and the growth outlook is now much better. The content gains in both segments should help to achieve the long-term growth outlook set out by management. Note that I previously rated a hold rating for WWD as I was unsure about how the margin performance was going to be in the near term.
Recent results & updates
WWD reported total 4Q23 revenue of $777 million, showing 21% organic growth. The strong growth was driven by 11% growth in Aerospace revenue to $455 million and industrial revenue growth of 39% to $322 million. The margin concern that I had previously appeared to not be a big issue, apparently. Segment operating margin came in at 17.1%, an increase of 390 bps vs. last year. Both Aerospace and Industrial EBIT margins improved y/y as well, with Aerospace up 170 bps and Industrial up 790 bps on a y/y basis. Overall, performance was pretty great, and with management revising its long-term financial target at its analyst day, I am now much more positive about the outlook.
Touching first on the revised long-term outlook. Management guidance now includes:
- 7 to 9% organic growth CAGR through FY26. Using 8% as the midpoint, it implies that WWD will be able to achieve around $3.7 billion in revenue.
- Earnings to grow at twice the pace of revenue, implying 14 to 18% growth (excluding inorganic contributions).
- Free cash flow conversion of more than 100% (implying more than 4% FCF yield at the current valuation)
The focus for WWD is its Aerospace segment, which management has targeted to grow at an 8–10% CAGR through FY26. Aerospace margin target was also raised slightly to 20 to >22% from the >20% target previously. In my view, after reviewing the recent performance and management comments, I am positive that this guidance can be achieved. The most important factor would be the increase in WWD content for the newest generation of narrowbody aircraft compared to the previous generation. Those improvements, in my opinion, would improve WWD’s commercial aftermarket growth rate in the long run. In particular, management pointed out that items with a stronger aftermarket presence were the primary focus of the shipset content increase. This means that the engines used by the A320neo and 737MAX have a much higher aftermarket service value (5x vs. prior generations), even though the shipset value is 3x higher than earlier generations. In my opinion, this sizable multiplier should more than sustain above-market growth for the foreseeable future. Management projected a 12% growth rate for the commercial aftermarket between 2023 and 2031, exceeding the industry average of 6% growth. Keep in mind that management is being cautious with the LEAP aftermarket ramp, so growth is expected to accelerate starting in FY26. As such, the aftermarket growth rate should be accelerated by the multiple effects beyond 2026.
On the other hand, WWD’s Industrial segment should also drive growth, especially with the shift toward more dual fuel engines which should offer a tailwind. Management provided an example of the possible impact by stating that the content’s value for these engines could be more than 50% greater than for an engine that uses just one fuel source. As the proportion of marine engines powered by dual fuel engines continues to rise, I anticipate that this enormous increase in potential demand will propel Industrial to experience above-market growth in the years ahead. Given the relative technical complexity of these dual fuel products, I also think their pricing and margins could be higher. This has the potential to boost Industrial’s profit margins even further.
Valuation and risk
According to my model, WWD is valued at ~$170 in FY25, representing a 24% increase over 2 years. This target price is based on management earnings growth guidance through FY26, which I believe is achievable given the growing content penetration in both the Aerospace and Industrial segments. With the improved growth outlook, I believe WWD’s current 27x forward PE multiple is much more justifiable when compared to its 5-year trading history. Over the past 5 years, WWD revenue grew at a CAGR of 5% and was trading at a high 20+ forward PE. Now that the growth outlook is much better, I believe it deserves to trade in the same range.
The extended time it takes for engine shops to complete repairs is a big problem for WWD’s aftermarket business since it delays the demand pull for WWD’s parts. The impact on revenue and earnings has been negative, and it’s possible that this will remain so in 2024.
I am now recommending a buy rating for WWD as management’s revised long-term guidance indicates a positive growth trajectory through FY26. The main driver is Aerospace growth, particularly in content for newer aircraft generations. Also, the growth in dual fuel engines should also drive above-market growth for the Industrial segment. My valuation model has a target price of $170, driven by WWD enhanced growth prospects and a forward PE multiple of 27x.
Unleashing Potential: Why Woodward’s Growth Outlook is Soaring Through 2026 (NASDAQ:WWD)
If you are an investor looking for a company with a promising growth outlook, then Woodward (NASDAQ:WWD) is definitely a stock worth considering. The aerospace and industrial company has been making headlines in the financial world with its impressive growth projections for the next five years. In this article, we will delve deeper into what is driving Woodward’s growth and why it has caught the attention of investors and analysts alike. So, buckle up and let’s explore the potential of this soaring company.
Understanding Woodward’s Core Business
Woodward is a global leader in aerospace and industrial systems, providing innovative solutions such as fuel systems, power distribution systems, rotor blades, and more. The company’s core business is divided into two segments: Aerospace, which generates 64% of its total revenue, and Industrial, which contributes 36% of its revenue. In recent years, Woodward’s Aerospace segment has been the main driver of its growth, with a strong presence in the commercial and military aircraft markets.
Factors Driving Woodward’s Growth
1. Aerospace Market Demand
The global aerospace industry has been witnessing steady growth in recent years, driven by increased air travel demands, technological advancements, and rising defense budgets. According to a report by the Teal Group, global aerospace and defense industry sales are expected to reach $4.2 trillion from 2020 to 2029, with a projected annual growth rate of 4.4%. With Woodward’s strong presence in the aerospace market, this growth is expected to translate into increased demand for the company’s products and solutions.
2. Focus on Innovation and R&D
Woodward has a strong focus on innovation and investing in research and development (R&D). The company’s R&D budget has been growing steadily over the years, with a 9% increase in 2020, bringing it to a total of $195 million. This focus on R&D allows Woodward to stay ahead of the curve by developing cutting-edge solutions that cater to the evolving needs of the aerospace and industrial markets. It also allows the company to maintain a competitive edge and potentially enter new markets, driving its growth potential.
3. Strategic Acquisitions
In recent years, Woodward has been making strategic acquisitions to expand its product portfolio and market reach. In 2019, the company acquired GE Aviation’s fuel systems business, strengthening its position in the aerospace market. This acquisition has already started to bear fruit, with this segment reporting a 17% increase in sales in 2020. Moreover, Woodward also acquired L’Orange, a German fuel injection systems manufacturer, expanding its presence in the industrial market. These acquisitions not only contribute to the company’s revenue growth but also provide cross-selling opportunities.
4. Strong Financial Performance
Woodward’s impressive financial performance is a testament to its growth potential. In the first quarter of 2021, the company reported a 2% increase in net sales and a 5% increase in adjusted earnings per share compared to the same period last year. Furthermore, with its backlog reaching a record high of $1.6 billion, Woodward’s future revenue is secure, providing a positive outlook for investors.
Projected Growth through 2026
With all these factors working in its favor, Woodward has provided a strong growth outlook for the next five years. The company has set a target of achieving a compound annual growth rate (CAGR) of 6-8% in net sales, a 10-12% CAGR in earnings per share, and an 11-13% CAGR in free cash flow from 2020 to 2026. This projection takes into account the continued growth in the aerospace market, the potential for new acquisitions, and the company’s focus on innovation and efficiency.
Investing in Woodward not only presents the potential for solid financial returns, but it also allows investors to be a part of a company that values sustainability and contributing to a better world. Woodward has set ambitious sustainability goals, such as achieving net-zero emissions by 2040 and reducing its waste generation by 75% by 2026. Furthermore, the company is involved in various community development and philanthropic initiatives, making it a company that investors can be proud to support.
Woodward’s growth potential is undeniable, driven by various factors, such as market demand, innovation, strategic acquisitions, and a strong financial performance. The company’s projected growth through 2026 and its commitment to sustainability make it a promising stock for investors looking for long-term growth opportunities. With its solid track record and strategic initiatives, Woodward is set to continue soaring in the years to come.
Benefits of Investing in Woodward:
– Strong growth potential through 2026
– Exposure to the growing aerospace and industrial markets
– Focus on innovation and R&D for competitive advantage
– Strategic acquisitions for market expansion
– Strong financial performance and backlog
– Commitment to sustainability and community development
Tips for Investing in Woodward:
– Do your research and stay updated on the company’s financial performance
– Monitor market trends and the aerospace and industrial sectors
- Keep an eye on potential acquisition opportunities
– Understand the company’s sustainability goals and initiatives
– Consider a long-term investment strategy for maximum returns
– Seek guidance from a financial advisor before making any investment decisions.