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Woodward (WWD) Research Report: Q1 CY2024 Update


Full Report / June 07, 2024

Aerospace and defense company Woodward (NASDAQ:WWD) reported Q1 CY2024 results beating Wall Street analysts' expectations, with revenue up 16.3% year on year to $835.3 million. The company's full-year revenue guidance of $3.3 billion at the midpoint also came in 1.7% above analysts' estimates. It made a non-GAAP profit of $1.62 per share, improving from its profit of $1.01 per share in the same quarter last year.

Woodward (WWD) Q1 CY2024 Highlights:

  • Revenue: $835.3 million vs analyst estimates of $808.9 million (3.3% beat)
  • EPS (non-GAAP): $1.62 vs analyst estimates of $1.34 (20.8% beat)
  • The company lifted its revenue guidance for the full year from $3.23 billion to $3.3 billion at the midpoint, a 2.3% increase
  • Gross Margin (GAAP): 28.1%, up from 22.1% in the same quarter last year
  • Free Cash Flow of $82.84 million, up from $4.98 million in the previous quarter
  • Organic Revenue rose 16.4% year on year
  • (22.4% in the same quarter last year)
  • Market Capitalization: $11.09 billion

Initially designing controls for water wheels in the early 1900s, Woodward (NASDAQ:WWD) designs, services, and manufactures energy control products and optimization solutions.

Woodward produces a variety of industrial electrical equipment used in engines, turbines, power generation, and mobile equipment. The company also provides aftermarket repair, maintenance, and replacement for products.

Woodward primarily serves original equipment manufacturers (OEMs) such as Raytheon and General Electric. Government agencies also utilize the company’s products and services, particularly in the aerospace sector through contracts varying in scope Additionally, entities from specialized industries involved in power generation and utilities utilize Woodward’s products and services.

Collaborations in research and design with OEM customers allow the company to create products tailored to their requirements, enhancing relationships and future sales. Woodward also sells products through an independent network of distributors and, in some cases, directly to end users. Contracts with a majority of its customers for services and distribution generate positive customer relationships and recurring sales.

Aerospace

Aerospace companies often possess technical expertise and have made significant capital investments to produce complex products. It is an industry where innovation is important, and lately, emissions and automation are in focus, so companies that boast advances in these areas can take market share. On the other hand, demand for aerospace products can ebb and flow with economic cycles and geopolitical tensions, which can be particularly painful for companies with high fixed costs.

Woodward’s peers and competitors include Moog (NYSE:MOG.A) and Collins Aerospace (NYSE:COL).

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Woodward's 3.3% annualized revenue growth over the last five years was sluggish. This shows it failed to expand its business in any major way. Woodward Total Revenue

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on new catalysts such as a contract win or a successful product line. Woodward's annualized revenue growth of 19.1% over the last two years is above its five-year trend, suggesting its demand has recently accelerated.

We can better understand the company's sales dynamics by analyzing its organic revenue, which strips out currency fluctuations and one-time events like acquisitions because they don't accurately reflect the company's demand. Over the last two years, Woodward's organic revenue averaged 19.3% year-on-year growth. Because this number aligns with its revenue growth, we can see the company's core operations drove most of its performance. Woodward Year-On-Year Organic Revenue Growth

This quarter, Woodward reported robust year-on-year revenue growth of 16.3%, and its $835.3 million of revenue exceeded Wall Street's estimates by 3.3%. Looking ahead, Wall Street expects sales to grow 3.9% over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Woodward has managed its expenses well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.4%.

Analyzing the trend in its profitability, Woodward's annual operating margin rose by 1.5 percentage points over the last five years. Its growth was impressive, especially when considering most Aerospace peers saw their margins plummet.

Woodward Operating Margin (GAAP)

This quarter, Woodward generated an operating profit margin of 13.9%, up 8.3 percentage points year on year.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Woodward's weak 3.5% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.

Woodward EPS (Adjusted)

Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. Woodward's two-year annual EPS growth of 42.7% topped its 19.1% two-year revenue growth.

In Q1, Woodward reported EPS at $1.62, up from $1.01 in the same quarter last year. This print beat analysts' estimates by 20.8%. Over the next 12 months, Wall Street expects Woodward to perform poorly. Analysts are projecting its EPS of $5.77 in the last year to shrink by 7.1% to $5.37.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Woodward has shown robust cash profitability, giving it an edge over its competitors and the option to reinvest or return capital to investors. The company's free cash flow margin averaged 10.6% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Woodward's margin expanded by 2.3 percentage points during that time. This is encouraging and shows the company is heading in the right direction.

Woodward Free Cash Flow Margin

Woodward's free cash flow clocked in at $82.84 million in Q1, equivalent to a 9.9% margin. This quarter's result was good as its margin was 7.8 percentage points higher than in the same quarter last year, but we wouldn't read too much into it because working capital needs can be seasonal and cause short-term swings.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money it has raised (debt and equity).

Woodward's five-year average ROIC was 8.5%, somewhat low compared to the best industrials companies that consistently pump out 20%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

Woodward Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Woodward's ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Woodward reported $316.9 million of cash and $791 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $598.7 million of EBITDA over the last 12 months, we view Woodward's 0.8x net-debt-to-EBITDA ratio as safe. We also see its $33.61 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Woodward's Q1 Results

We were impressed by how significantly Woodward blew past analysts' organic revenue expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. Zooming out, we think this was a great quarter that shareholders will appreciate.

Is Now The Time?

Woodward may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We have other favorites, but we understand the arguments that Woodward isn't a bad business. Although its revenue growth has been weak over the last five years, its organic revenue growth has been marvelous. Investors should still be cautious, however, as its projected EPS for the next year is lacking.

Woodward's price-to-earnings ratio based on the next 12 months is 33.9x. There are things to like about Woodward and there's no doubt it's a bit of a market darling, at least for some investors. But we think there's a lot of optimism already priced in and wonder if there are better opportunities elsewhere.

Wall Street analysts covering the company had a one-year price target of $167.25 right before these results (compared to the current share price of $184.67).

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