Esterline Technologies: Buy High, Sell Higher

It has been said before: buy the downgrade. This seems to be a very wise decision for those who are long-term investors. With downgrades we generally see some immediate downside to a stock, and it gives an investor the opportunity to start buying shares and adding to them as each consecutive downgrade occurs. This value strategy is sound in some cases, but beware of stocks that do not have sound fundamentals or outlook with respect to this strategy as you could be buying right when the bottom is falling out of a stock.

An area I have major interest in is aerospace. Much of the sector has been hit as Boeing (BA) and Airbus try to figure out how to get the Dreamliner and A380 off of the ground. This does not provide a good picture of what is about to happen in this industry. First, the United States' airlines are looking to consolidation for pricing power and the ability to buy new planes as their fleets are outdated. Second the newer, better fuel efficiency will save costs and need to be brought on line, which is evident with the Dreamliner. Also, world militaries are buying new planes, anywhere from fighters to refuelers, and cargo transports. The United States is replacing their old fleet, as seen with the deal given to Airbus, and emerging markets are buying new technologies as their coffers of cash are overflowing. Lastly, emerging markets are beginning to buy planes for travel within their countries, replacing their current busing systems. All of this will be part of the aerospace boom in the upcoming years.

This is where Easterline Technologies (ESL) comes in. It is amazing that we do not hear more from this company like we do from Be Aerospace (BEAV) and Goodrich (GR). They have a well diversified exposure to this sector and I think they look to have much more to come. Their company provides, and are not limited to, Avionics and Optics Group, Control Systems Group, Interface Technologies Group, Sensors Group, Motion Group, Power Distribution Group, Defense Group, Engineered Materials Group, and Metal Finishing Group. Esterline became incorporated in 1967 and has acquired over 30 companies since 1996 with annual revenues exceeding $500 million. They have also divested themselves from 16 companies of over $200 million in annual revenues as they did not fit their current company dynamic. Esterline remains focused on acquisitions and investing in the company.

On May 14th, ESL broke through their all time high in triple top fashion. The current trend is bullish, but be wary as this breakout was done without a substantial amount of volume. ESL has beaten earnings estimates three out of the last four quarters and met expectations the other. They beat earnings by 16.9%, 10.9 and 76.3%. This year's earnings growth is estimated at 32.2% and 25.5% over the next five. The current PE of 14.47 is inexpensive with respect to their growth rate. I believe they trade at a discount to their peers as 80% of the company revenues are from aerospace and defense, while the other 20% comes from industrial markets. First quarter earnings were a surprise as they beat analyst estimates by 76.27%. Segment earnings rose to $45 million vs. $28.3 million a year ago. Gross margins improved to 32.2% from 29% year over year. Sales increased to $372.4 million from $257.2 million. Diluted earnings per share were $1.04 vs. $.49 a year ago.

The reason I feel strongly about how the company will do long term is that these companies will start the aerospace run as ESL provides not only the precision parts, but high tech equipment needed to build the aircraft. When they begin to move, the whole sector will follow. This is a case of buy high, sell higher.

Disclosure: none