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Curtiss-Wright (CW) Research Report: Q1 CY2024 Update


Full Report / June 03, 2024

Aerospace and defense company Curtiss-Wright (NYSE:CW) reported Q1 CY2024 results topping analysts' expectations, with revenue up 13% year on year to $713.2 million. The company expects the full year's revenue to be around $3.01 billion, in line with analysts' estimates. It made a non-GAAP profit of $1.99 per share, improving from its profit of $1.48 per share in the same quarter last year.

Curtiss-Wright (CW) Q1 CY2024 Highlights:

  • Revenue: $713.2 million vs analyst estimates of $664 million (7.4% beat)
  • EPS (non-GAAP): $1.99 vs analyst estimates of $1.74 (14.3% beat)
  • The company lifted its revenue guidance for the full year from $2.99 billion to $3.01 billion at the midpoint, a 0.8% increase
  • Gross Margin (GAAP): 35.6%, up from 35.1% in the same quarter last year
  • Free Cash Flow was -$57.69 million, down from $270 million in the previous quarter
  • Market Capitalization: $10.83 billion

Formed from a merger of 12 companies, Curtiss-Wright (NYSE:CW) provides a range of products and services to the aerospace, industrial, electronic, and maritime industries.

During World War II Curtiss-Wright produced more than 29,000 airplanes for the military. No longer producing aircraft, the company has focused on manufacturing components like propulsion and electronic systems with applications to aerospace and maritime vehicles. Services like repair and overhaul, vehicle coatings, and simulation training are also marketed.

Nearly half of the company’s revenue comes from long-term contracts and research programs with agencies of the U.S. Government and their contractors who use the company’s components to power naval fleets and build aircraft. Commercial customers, like Boeing and Airbus, primarily employ Curtiss-Wright’s OEM products and services for commercial jets. Original equipment manufacturers and aftermarket industrial customers purchase the company’s vehicle components and services.

Curtiss-Wright markets its products and services through strategic collaborations with well-known industry players such as AMD and General Dynamics to create joint marketing and sales programs. The company further markets its products through channels such as direct sales, distributors, and foreign sales offices which increases its global reach.

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.

Curtiss-Wright’s peers and competitors include Lockheed Martin (NYSE:LMT), General Electrics (NYSE:GE), and Honeywell International (NASDAQ:HON)

Sales Growth

Reviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Curtiss-Wright's 3.9% annualized revenue growth over the last five years was sluggish. This shows it couldn't expand its business in any major way. Curtiss-Wright Total Revenue

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Curtiss-Wright's annualized revenue growth of 9.3% over the last two years is above its five-year trend, suggesting its demand has recently accelerated.

We can dig further into the company's revenue dynamics by analyzing its most important segments, Product and Services, which are 83.5% and 16.5% of revenue. Over the last two years, Curtiss-Wright's Product revenue (aerospace & defense technology) averaged 9.8% year-on-year growth while its Services revenue (testing, maintenance, consulting) averaged 6.4% growth.

This quarter, Curtiss-Wright reported robust year-on-year revenue growth of 13%, and its $713.2 million of revenue exceeded Wall Street's estimates by 7.4%. We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates. This signals Curtiss-Wright could be a hidden gem because it doesn't get attention from professional brokers.

Operating Margin

Curtiss-Wright has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 15.8%.

Analyzing the trend in its profitability, Curtiss-Wright's annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years. We like to see margin expansion, but Curtiss-Wright's performance still shows it's one of the better Aerospace companies as most peers saw their margins plummet.

Curtiss-Wright Operating Margin (GAAP)

This quarter, Curtiss-Wright generated an operating profit margin of 14%, up 1.6 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.

Curtiss-Wright's EPS grew at a decent 8.2% compounded annual growth rate over the last five years, higher than its 3.9% annualized revenue growth. This tells us the business became more profitable as it expanded.

Curtiss-Wright EPS (Adjusted)

Diving into Curtiss-Wright's quality of earnings can give us a better understanding of its performance. A five-year view shows that Curtiss-Wright has repurchased its stock, shrinking its share count by 10.7%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Curtiss-Wright, its two-year annual EPS growth of 25.3% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Curtiss-Wright reported EPS at $1.99, up from $1.48 in the same quarter last year. This print beat analysts' estimates by 14.3%. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but there is insufficient data. This signals Curtiss-Wright could be a hidden gem because it doesn't have much coverage among professional brokers.

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.

Curtiss-Wright 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 12.4% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Curtiss-Wright's margin expanded by 6.6 percentage points during that time. This is encouraging because it gives the company more ways to win.

Curtiss-Wright Free Cash Flow Margin

Curtiss-Wright burned through $57.69 million of cash in Q1, equivalent to a negative 8.1% margin. The company's cash burn decreased by 43.6% year on year while its free cash flow margin climbed 8.1 percentage points. This dynamic shows Curtiss-Wright's management team brought in more revenue this quarter despite spending less cash - a mark of higher efficiency.

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? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Curtiss-Wright's five-year average ROIC was 11.9%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, Curtiss-Wright's invested capital has produced decent profits.

Curtiss-Wright Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, Curtiss-Wright's ROIC averaged 1.2 percentage point increases each year. The company has shown the ability to generate good returns in the past, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Curtiss-Wright reported $338 million of cash and $1.05 billion 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 $626.8 million of EBITDA over the last 12 months, we view Curtiss-Wright's 1.1x net-debt-to-EBITDA ratio as safe. We also see its $27.88 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 Curtiss-Wright's Q1 Results

We were impressed by how significantly Curtiss-Wright blew past analysts' operating margin expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is flat after reporting and currently trades at $282.82 per share.

Is Now The Time?

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

We think Curtiss-Wright is a good business. Although its revenue growth has been uninspiring over the last five years with analysts expecting growth to slow even further from here, its rising cash profitability gives it more optionality. On top of that, its impressive operating margins show it has a highly efficient business model.

Curtiss-Wright's EV-to-EBITDA ratio based on the next 12 months is 20.9x. There are definitely things to like about Curtiss-Wright and there's no doubt it's a bit of a market darling, at least for some investors. But when considering the company against the backdrop of the industrials landscape, we think there's a lot of optimism already priced in. This is a business you should add to your watchlist - we believe there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $267.83 right before these results (compared to the current share price of $282.82).

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