Woodward Misses Expectations And Implicitly Cuts 2013 Guidance

| About: Woodward, Inc. (WWD)
This article is now exclusive for PRO subscribers.

Woodward, Inc. (NASDAQ:WWD) operates production and assembly facilities across the globe, and is primarily involved in the design and manufacturing of energy controls as well as optimization and maintenance services to the aerospace and energy markets. The company trades on the Nasdaq and currently has a market capitalization of $2.68 billion.

The company announced its Q1 2013 operating and financial results on Jan. 22 and reported that revenues generated in the quarter were $408.3 million, essentially flat over Q1 2012 revenues of $407.9 million. However, the company did miss consensus estimates of $435.27 million, a miss of $26.97 million. Similarly, earnings per share in the quarter came in at $0.39, flat over $0.40 in the same period last year and missing analyst estimates of $0.45 by $0.06.

According to the company's chief executive, results for the first quarter were subject to normal seasonal patterns and increased economic volatility. The company's aerospace division managed to grow sales by 9% to $211.4 million on the back of robust military sales, while the energy division managed to offset that increase with sales declining 8% from $214.7 million in Q1 2012 to $197 million in Q1 2013.

Click to enlarge image.

Given the lackluster results and the lack of growth in the first quarter, investors might be perplexed to discover that the company increased its revenue guidance from a range of $1.85 billion to $2.0 billion given in the fourth quarter of 2012, to $1.9 billion to $2.0 billion given on Jan. 22. Earnings estimates were also amplified from a range of $2.15-$2.35 to $2.22-$2.42.

Digging deeper, investors will discover that the company actually implicitly cut its guidance, and that reduction is camouflaged with an acquisition announced Dec. 28, 2012. More specifically, Woodward announced on that date a $200 million acquisition of GE Aviation's hydraulic thrust reverser actuation systems business, or the Duarte business. The Duarte business serves customers such as Boeing (NYSE:BA), GE (NYSE:GE), Safran (OTCPK:SAFRY), and the U.S. government and its products are used primarily on commercial aircraft such as the Boeing 737.

At the time of the acquisition, the company indicated that the business is expected to generate roughly $150 million in sales and be slightly accretive to Woodward earnings in 2013. Using the 2013 guidance provided by the company in the fourth quarter of 2012, the pre-acquisition revenue estimate was in a range of $1.85 billion to $2.0 billion. Adding the estimated Duarte sales of $150 million, we should arrive at a range of $2.0 billion to $2.15 billion.

Pre-acquisition guidance


Plus: Duarte acquisition


Post-acquisition estimate


On Jan. 22, the company updated its sales guidance range to $1.9 billion to $2.0 billion. To the naked eye, this update might seem to be an increase. However, it is actually a cut as the post-acquisition estimate is materially higher. In fact, the new guidance for 2013 cut sales by $100 million on the lower end of the range and $150 million on the upper end of the range. To put it into perspective, the cut on the high end of the range is $150 million, or as much as the company was expecting the Duarte acquisition will generate in sales in the whole 2013 calendar year.

Therefore, the Duarte acquisition essentially hides the entire cut to guidance. The market usually sees through simple financial creativity and will certainly react. Investors will react to the implicit cut in sales, while short-term traders will react to both the top-line and bottom-line misses. Either way, investors are encouraged to stay on the sidelines when it comes to Woodward, or set their sights on superior opportunities elsewhere.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.