Several months ago, I wrote an article about the Paris Air Show. In that article, I discussed the current bull cycle hitting the aerospace sector. I gave investors several companies to invest in as a way to capitalize on the current cycle. Today, I have found a small company that could see huge results from the aerospace bull cycle and reward patient shareholders over the next five years.
Astronics (ATRO) is a leader in aircraft parts, with a specialty on airplane cabin electronics. Here is a look at some of the parts made by Astronics:
· Aircraft lighting, aircraft power, aircraft safety, airfield lighting, enhanced vision systems, structures, cabin power, test solutions, training & simulation, avionics databus interface solutions, interiors, antenna systems
Over the last twelve months, here is a breakdown of the company's revenue by market:
· 71% Commercial Transportation
· 14% Military
· 11% Business Jets
· 4% FAA/Airports
By product segment over the last twelve months:
· Cabin Electronics: 56%
· Aircraft Lighting: 26%
· Airframe Power: 7%
· Avionics: 7%
· Airfield Lighting: 4%
Several small acquisitions have powered Astronics revenue growth and are also leading the company going forward. In May, Astronics paid $136 million in cash to acquire PECO. Specializing in passenger services units, PECO will complement many of Astronics current business lines and increase its revenue per plane. PECO also makes parts for air handling, emergency oxygen, electrical power management, and cabin lighting systems. In 2012, PECO had sales of $77.8 million. In 2013, the company is expected to post revenue of $83 million.
On October 1st, Astronics acquired the assets of AeroSat for $12 million. The company is expected to post revenue of $12 to $14 million for 2013. The acquisition also comes with possible payments of up to $20 million if certain milestones are met. AeroSat designs and manufactures aircraft antenna systems for broadband connectivity and satellite television. The acquisition should allow Astronics to capitalize on more people wanting to be connected while aboard airplanes. More details of this acquisition and its integration should come during Astronics' third-quarter earnings call.
In November, Astronics acquired PGA Electronic. The acquisition gives Astronics the leader in manufactured seat motion and lighting systems for business and first class areas on airplanes. PGA is also Europe's leader of in-flight entertainment and cabin management for VIP aircraft. The company currently gets 91% of its sales from Europe, which leaves a ton of upside for Astronics to integrate the products into the United States via its current contracts and partnerships. The $28.5 million acquisition will be paid for with 60% cash and 40% Astronics shares. Last year, PGA Electronics had sales of $44 million, with similar margins as Astronics.
In June, Astronics announced its subsidiary Luminescent Systems Canada had extended a current deal with Rockwell Collins (COL). The deal includes products like illuminated cockpit control panels, keyboards, display bezels, and related assemblies. The extension continues the strength of Astronics strong partnerships. The company has a strong partnership base that counts Rockwell, Panasonic, L3, Boeing, General Atomics, and GE Aviation. The key customers is a huge piece, considering Astronics competes against large companies like Goodrich and Honeywell in many of its business segments.
From an August presentation, here is a look at Astronics placement on several prominent future aircraft:
· Piaggio Avanti: cockpit lighting
· UH-60 Blackhawk: exterior cockpit lighting
· V-22 Osprey: cabin, cockpit & exterior lighting
· Cessna: exterior & cockpit lighting
· Boeing 737 NG & BSI: PSU, fuel doors & passenger power available
· Embraer Phenom 100/300: exterior lighting
· Airbus A380: cabin lighting & cabin electronics
· Boeing 787: cabin electronics & fuel doors
· F-35 JSF: exterior lighting suite & lighting controllers
· Learjet 85: electrical power distribution
· Pilatus PC-24: EPDS & starter generator
· Airbus 350: cabin lighting & electronics
· Two Unnamed Biz Jets: electrical power distribution
One of those future aircrafts is beginning to take shape. Boeing's (BA) 787 is ramping up production and should provide a nice boost to Astronics. In the second quarter, Astronics saw revenue of $5.1 million from the 787. This total, along with the $2.8 million from the first quarter, gives Astronics $7.9 million in first half revenue from the 787. This number will climb up as more 787s are built and also through Astronics' larger revenue per plane due to its acquisitions.
Astronics is trying to maximize its revenue per airplane. Here are two examples from the August Jefferies Global Industries Conference:
· Boeing 787 (outlet units, in-use lights, passenger power), provides 300 outlet units, 75 in-use lights. Currently gets $200,000 per plane from Boeing.
· Lear 85 (electronic power system), will receive $225,000 to $230,000 per plane.
· V-22 (lighting systems), will receive $70,000 to $75,000 per plane.
The PECO acquisition has greatly improved Astronics relationship with Boeing. Here is a look at what PECO gets per plane for several of Boeing's units:
· 737: $100,000
· 777: $235,000
· 787: $45,000
· 747: $30,000
As you can see, the acquisition now gives Astronics almost $250,000 in revenue per Boeing 787. This is a great improvement for Astronics and should make the company one of the bigger winners from this popular Boeing plane, which has a huge backlog.
Another area to watch regarding Astronics is a USB product that can "power multiple iPad type devices". The company said on its second quarter earnings call that it made its first shipment of the product. Here is further detail from the question and answer segment:
· And we think as the airlines adopt the technology and do their promotion, every other airline around the world will take notice, and it'll start to be one of those trickling effects, where some airlines will work hard to kind of keep up and some -- not everybody's going to do it. Some things are like people, they have their own personalities and make their own choices. Some will never put this kind of product on, but we think that as surely as people are carrying iPads and computers on the airplanes, they're going to be demanding power. And some airlines, we think, a large number of airlines, will choose to satisfy that power by putting our kind of system on.
That seems like winning technology that could take advantage of the bullish aerospace sector and the need for connectivity when up in the air. Look for more details to come out on this in the near future. Astronics won't release names of companies using the technology yet.
In 2013, I was so bullish on the aerospace market that I selected HEICO (HEI) as one of my top ten picks. The company rewarded shareholders with a return of 62% on the year. HEICO focuses on flight support and electronic technologies for airplanes and benefited from a backlog of large plane orders. In similar fashion, Astronics should see its stock continue to rise as it sees more planes ordered and commands more revenue per plane.
Astronics competes against several companies for many of its markets. Large $70 billion company Honeywell (HON) competes against Astronics in several areas of the plane, but the company is an industrial giant and not necessarily a pure play on the growing aerospace market. Honeywell getting new plane orders doesn't have the ability to move the needle as much as it does for Astronics. This is why Astronics is expected to post revenue growth of 20-40% over each of the next two years, compared to Honeywell with expected growth of 5%. Astronics also competes with Aveo Engineering, a private aerospace company.
In July, Astronics reported strong second quarter earnings. Revenue of $70.8 million was a 9% year over year improvement, and continued the success from the first quarter. The first quarter revenue of $74.0 million marked the highest in company history, and Astronics has now posted its best two quarters ever in back to back reports. Net profit hit $5.2 million, representing earnings per share of $0.34.
For the first half of the year, Astronics has now reported revenue of $145 million, which is an 11% improvement from the prior year. Earnings per share for the first half of the year came in at $0.90. For the first half of the year, the company's Aerospace business segment leads the way with $140 million, or 97% of total revenue. The other 3% comes from the company's Test Systems unit, which saw first half sales decline to $4.5 million ($5.7 million).
Here is a look at revenue and earnings for the last four years, along with current company estimates for 2013:
Earnings Per Share
$325.0 to $340.0 million
No estimates given
Astronics sits in good financial shape. The company ended the second quarter with $16.5 million in cash and a total debt of $25 million. Astronics also has a $190 million term note due in 2018. This gives Astronics the flexibility to continue its higher spending to ramp up production for the current aerospace bull cycle. It also means Astronics could be ready to make more small acquisitions.
The big risks with investing in Astronics are its relatively small size. Astronics competes with large companies in many of its fields and risks losing out on supplying new planes. The company is also spending more money on production, which might hurt margins over the short term, but could reward long-term revenue growth.
Analysts on Yahoo Finance expect the company to post earnings per share of $1.70 in fiscal 2013. Revenue is expected to increase 27.8% to $340.7 million. In fiscal 2014, analysts see earnings per share rising to $2.43. Revenue is projected to rise 41.7% to $482.7 million.
There are several ways to play the aerospace boom. Investors can invest in the aircraft companies themselves or take advantage of companies like Astronics that supply parts to several aircraft companies. Astronics has projected double digit revenue growth over the next two years. I think with double digit growth, shares are a good long-term bet on the current aerospace bullish cycle.