Rockwell Collins (COL) is having issues growing the business. The US defense market is stable or declining at the moment, but Rockwell Collins might be preparing for a changing strategy to grow.
All financial data used is from reports published by Rockwell Collins. The FY ends at September 30.
(x1M with the exception of Dividend and EPS)
Rockwell Collins produces avionics, electronic and communications equipment for avionics and defense use.
Rockwell Collins also has a information management services which is focused on processing aviation information. ARINC was acquired in August 2013 because of its strong position in airport information systems
About half the revenue is from the US Government (52%) and half from the commercial sector (48%). Rockwell Collins expects low single digit growth from the government sector, but double digit growth in the commercial sector.
The outlook for Rockwell Collins is stable. Not too much downside, but neither much upside. At a PE of 17 it looks like a fair price, or is there something else to consider?.
CHANGING THE COMPANY
In August 2013 Rockwell Collins announced the sale of Kaiser Optical Systems. "This divestiture is part of an overall strategy to accelerate our focus on growth opportunities in our addressed markets" said Rockwell Collins Chief Executive Officer and President Kelly Ortberg.
When the ARINC acquisition was completed in December 2013, Kelly Ortberg, CEO and president of Rockwell Collins said: "The acquisition represents an exciting new growth platform for Rockwell Collins and shifts the balance of the company toward the expanding commercial aviation sector."
But the most important trigger was on slide 9 of the presentation at the Credit Suisse Global Industrials Conference on December 3, 2013. In the outlook for 2014 Rockwell Collins invests $950M in R&D. This is a staggering 20% of total revenue in 2013!
This is an extremely high percentage and most likely part of it is paid by an external party. In the defense sector it is customary that R&D costs are paid for, but that isn't likely in this case. Rockwell Collins is aiming to grow in the commercial aviation sector.
The answer might be in China. Rockwell Collins already participates in the COMAC ARJ21 regional airliner for several years now. In 2011 Rockwell Collins was the only supplier to receive the Gold Medal out of nearly 50 other suppliers on the ARJ-21 program.
On January 15, 2014 Rockwell Collins announced that they signed a final agreement to establish a JV in flight simulation with Beijing Bluesky Aviation Technology, an AVIC subsidiary. AVIC is the Aviation Industry Administration Commission of the Chinese government.
If (part of) the huge R&D budget (relative to Rockwell Collins) is paid by China, it is probably related to the Chinese five-year plan to expand regional airlines as also mentioned in the future prospects of the Bombardier (OTCQX:BDRBF) - Embraer (ERJ) comparison.
At a PE of 17 Rockwell Collins is not expensive when a bigger involvement in China is announced. The stock could rise to:
On January 21 there is a conference call on the 2014 Q1 results and on February 6 the annual meeting of shareholders. More light might be shed on one of these events.