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Background – Our Approach to Covering Moog
Moog, Inc. (MOG.A, MOG.B) is an industrial products business with a substantial space division.
As our readers and subscribers know, we consider the space industry to be in its early stages of growth, and as a result there are relatively few pure-play space companies. Our analogy is the tech industry in the 1960s. So right now if one wants to invest in the business of space, usually one has to invest in companies that also do things other than space. This is no different to the early days of the tech industry, when to invest in a computer hardware company you had to buy shares in a punch-card company that also made computers. And software companies were buried within hardware companies because the merchant model had yet to really evolve. So it is with space. For Moog, as for Ball Corporation (BLL), here we have a business where the majority of revenues are non-space, but there is a very strong space division buried within, one which is strategic to the US space industry and indeed to US federal government space missions. As you know, we are building out our coverage of the US space industry and we would be remiss were we to avoid Moog simply because of its revenue mix. For the same reason, we will initiate coverage of BLL in due course.
Bearing in mind the above, as with our coverage of Boeing (BA), and our future coverage of BLL, we will be focusing our work almost entirely on MOG.A’s space business. Other analysts cover their industrials and aerospace lines of business – that’s not our focus – we’re a 100% space-sector-focused equity research business and our coverage of MOG.A reflects that. We’ll look at the other divisions solely to the extent that the performance of the other divisions impacts valuation matters.
Finally, a note on share classes. There are two traded classes – MOG.A and MOG.B.
Moog’s Class A shares (MOG.A) are the most liquid and are equivalent to common stock.
Class B shares (MOG.B) might be thought of as employee, friends & family stock. Class B shares have 75% of the votes for the election of the board of directors, vs. 25% for the Class A. Class B shares have 1 vote/share; Class A has one-tenth of a vote/share. Each class of stock trades at similar prices, but Class A is much more liquid, at hundreds of thousands of A shares/day traded, vs. hundreds or sometimes thousands of B shares/day traded.
Yesterday and Today
Moog was founded by William C. Moog in 1951. The company was and is based in East Aurora, NY. (For clarity, the famous synthesizer of the same name was invented by a cousin of William Moog – and the Moog auto parts business is an entirely separate enterprise owned by Federal-Mogul).
Today Moog, Inc is a $3.8bn EV business producing a number of critical spacecraft components, including avionics, propulsion (typically low-thrust satellite propulsion devices, not launch vehicle propulsion), actuators and power systems. MOG.A’s customers are mainly the old-line spacefaring companies such as Lockheed Martin (LMT), Aerojet Rocketdyne (AJRD), ULA, and so forth. Space 1.0, in essence. The company has been producing components for spaceflight for a long time and claims its parts have been included in missions to every planet in the Solar System, as the image below from their website indicates.
Source: Moog website
Moog’s Space Business
Approximately 25% of group revenue in FY18 (which runs from 1 Oct 2017 to 30 September 2018) was from Moog’s ‘Space and Defense Controls’ line of business. This has been the fastest-growing division for MOG.A, with a three-year historic CAGR of 7.9% vs. 6.0% for the business as a whole - so space & defense is growing at a rate about 1/3 faster than the business overall.
These numbers from the Space & Defense Controls division tell the same story we are seeing in so many companies – that space is a growth market, significantly outpacing US GDP growth.
Looking back at the last three years’ annual performance, the Space & Defense division here has had the following compelling characteristics within the group:
- It has grown faster than any other division and faster than the group at large.
- It has operated at a higher margin than any other division than the group at large.
- It has had more revenue visibility than any other division and more than the group at large.
Divisional Breakdown, FY16-FY18
The table below shows segment performance – corporate overhead, etc, is not included in segment operating income. We deal with the full company income statement in the valuation section below.
Source: Company SEC filings.
Note, here “backlog” means – confirmed orders that the company believes will be recognized as revenue within the next 12 months. So at the end of FY18 the company had identified $454m of confirmed orders in the space & defense division that they expected to become revenue in FY19.
Management’s outlook in their 2018 10-K supports the notion of strong growth in the Space & Defense division this year – guidance in the 10-K indicates +17% growth in revenue and +20% growth in operating income for this division in 2019. (Note, the huge +80% forecast growth in Industrial Systems’ operating income reflects an easy ‘lap’ of 2018 when a line of business was shuttered – that said, even excluding that impact, management expect Industrials to deliver some +60% growth in operating income. The 10-K has the details).
Looking now at the actual performance in FY19 versus FY18 – the company is two quarters in, as the financial year ends September 30.
Group revenue growth is bang on track at 6.2%, a little slower than planned in Space & Defense and a little faster than planned in Industrials. Segment operating income is ahead of the plan for the year, at +39% growth versus +30.6% forecast for the year. So far so good. The company states their business isn’t particularly seasonal so it’s reasonable to expect that these trends will continue. Full year guidance looks OK for now.
Turning now to group operating income, EBITDA and cashflow. For now we will look at the historic performance for the full years 2016-18.
Source: Company SEC filings, Cestrian analysis.
Right now the company is growing revenues at around 6%, but gross margins are falling, EBITDA is flat and unlevered pretax cashflow is falling substantially, due to heavy growth in capex and adverse changes in working capital. That’s not great.
We’ll do a detailed H1 2019 update on this in a few days’ time. There’s more usage of cash information to cover, including pension service costs, new-for-2018 dividends, and so on.
For now, going from the data held at Ycharts.com, we provide a TTM valuation analysis using operating performance as of 31 March 2019.
Right now MOG.A and MOG.B look extended. The valuation table below is for MOG.A, but the difference in stock price is minor so the logic holds for both.
Source: Ycharts.com, Company SEC filings, Cestrian analysis.
The revenue multiple isn’t so bad for an industrials business growing at 6% p.a.; and we could live with the EBITDA multiple if the EBITDA turned into pretax cashflow at decent level. But 29x TTM cashflows and 6% revenue growth is extended on a fundamentals basis.
So we initiate coverage at Neutral on a long-term basis.
However – just like one of the other stocks in our coverage universe, AJRD, the stock is volatile compared to the business, which means it will tend to over- and under-shoot on good or bad news respectively. This can be trying for the long-term investor but it can lead to sound returns for short-term trades. We will analyze this further and put a note out in the coming days.
And as always we will provide continuous coverage of MOG.A going forward, including earnings previews and post-ER reviews, every quarter.
Cestrian Capital Research, Inc – 5 June 2019.
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Disclosure: I/we 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.
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