Curtiss-Wright: Riding On The Backlog (NYSE:CW)

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Maksim Labkouski

At the start of the year, I believed that shares of Curtiss-Wright (NYSE:CW) were starting to fly high again after a decent, but not spectacular, 2021. The company started 2022 with a bolt-on deal, to add to its long-term acquisition track record, all while valuations looked very reasonable, leaving me upbeat on the potential of the shares.

A Strong Business

Curtiss-Wright is a $2.5 billion global diversified industrial company which operates in defense, commercial aerospace, industrial and power generation activities. Defense makes up half of sales, as all the other three segments combined make up the remaining half of revenues.

Ahead of the pandemic, Curtiss was a $150 stock, supported by earnings power of $7.25 per share as reported in 2019, as a 20-21 times earnings multiple was accompanied by a one times leverage situation. The business was hit hard in 2020, for obvious reasons, as the company even found the space to acquire Pacific Star Communications in a $400 million deal during that tough year.

In the end, 2020 earnings only fell to $6.87 per share as a relative conservative guidance, calling for 2021 earnings around $7.10 per share, indicated a tepid recovery as well. During the year the company increased the earnings guidance to $7.275 per share as net debt of $823 million was quite reasonable with EBITDA surpassing the half a billion mark.

With shares trading at $137 at the start of the year, the company traded at 18-19 times earnings, as a $6.4 billion enterprise valuation came down to a 2.6 times sales multiple with earnings awarded a market multiple in terms of the valuation.

The company announced a $240 million deal to acquire Safran Aerosystems at the start of the year, adding $70 million in sales, indicating that a 3.5 times sales multiple was paid. A $1.06 billion pro forma net leverage position came in around 2 times EBITDA. Working with a $7.50 per share earnings estimate for 2022, a forward looking 18 times earnings multiple looked fair, or even a bit attractive, making me a happy holder of the shares at that point, and at those levels.

Doing Well – The Stock That Is

With 50% of the business tied to defense activities, the business got an uplift from the major political tensions which arose at the start of the year. After some stagnation during the summer, shares have convincingly moved higher, now trading at $177 per share, marking $40 gains which comes in close to 25%, all while markets at large have seen tougher times.

Alongside the release of the 2021 results in February of this year the company guided for modest advancements in 2022 with sales and operating earnings seen up 4% at the midpoint of the guidance. Earnings per share were set to rise in a more meaningful fashion to a midpoint of $8.15 per share. After a non-eventful first quarter the company hiked the full year guidance in a modest fashion along the release of the second quarter results with sales seen up to a midpoint of $2.6 billion with earnings per share then seen at $8.20 per share.

Citing increased supply chain issues, along the release of the third quarter results, more than offsetting the combined impact of a strong dollar and inflation, the company cut the guidance again. Earning are now seen at a midpoint of $8.125 per share as net debt increased to $1.23 billion, in part because of increased working capital requirements and share buybacks.

With 38 million shares now trading at $177, a resulting $6.7 billion equity valuation, or $7.9 billion enterprise valuation, comes down to just over 3 times sales here, at 21-22 times earnings. This means that earnings multiples have increased by a factor of 3 times in a tougher environment as the promise of a good positioning is not yet seen in the results.

Following these results, the company announced a bolt-on deal to acquire Keronite Group Limited in a $35 million cash deal. The provider of Plasma Electrolytic Oxidation surface treatment applications is set to add $9 million in sales, truly a bolt-on deal at 4 times sales with a pro forma sales contribution of less than half a percent.

What Now?

The reality is that the shares of the company have done well in a market which has been struggling amidst higher interest rates and growth concerns, all while the company steadily seems to move on here. The lack of growth this year is a bit disappointing given the positioning, yet this good positioning is seen in the backlog which is up 19% to $2.6 billion.

This suggests an order intake of about $400 million more since the start of the year, setting the company up for solid growth in the year/years to come as this is what likely drives the stock here, the anticipation of higher future earnings.

Nonetheless, I am happy with the decent gains in this environment, as I am gradually trimming my positing a bit here, judging today’s valuation to be more than fair, leaving money to recycle elsewhere in the market.

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