- Curtiss-Wright continues to make bolt-on acquisitions, in line with its long-term winning strategy.
- The company has been selling off along with the market as well and now trades at a market multiple (although that might be down a bit as well).
- The long-term wining strategy and resilient balance sheet makes Curtiss-Wright look relatively attractive, although one has to recognize that the entire market has sold off.
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Curtiss-Wright (NYSE:CW) announced a bolt-on acquisition the day after releasing its full-year results for 2019, warranting an update on this long-term value creator which like the rest of the market has been hit by the impact of the Coronavirus.
The valuation looks compelling as the company has done a great job at integrating bolt-on deals, extracting real value from them, while preserving balance sheet integrity, thereby it does not put investors at risk. While shares are off quite a bit like the remainder of the market, this looks like a compelling entry level, yet the same applies for the rest of the market, and risks might of course become apparent to the full-year guidance.
A Look At The Latest Bolt-On
Curtiss-Wright has announced the bolt-on acquisition of Dyna-Flo Control Valve Services in a $62 million deal. The company designs and manufactures linear and rotary control valves, isolation valves, and pressure control systems. Typically, these products are found in the chemical, petrochemical and oil & gas markets, as one can have some doubts about the real growth potential for these end markets over time.
The company has been in business for over a quarter of a century, currently employs about 120 workers and is set to generate $25 million in sales, indicating that a 2.5 time sales multiple has been paid. No margin details have been announced other than that the deal will be accretive to adjusted earnings per share. Needless to say, this is truly a bolt-on deal as the expected sales contribution adds up to exactly 1% of the revenues reported by the firm in 2019.
Note that this is the second bolt-on deal in recent times. In December, CW acquired 901D Holdings LLC in a $132 million cash deal, adding about $50 million in annual sales.
The Business, The Thesis
Last time I looked at Curtiss-Wright was December of 2016 as the company made a bolt-on M&A move at the time as well. Back in 2016, the company was a $2.1 billion business focused on defense, industrial, aerospace and power generation. The company has always employed a business model of making bolt-on acquisitions, having acquired multiple small deals in recent years and decades.
The company has improved operating margins to mid-teens thanks to solid integration efforts and exposure to generally higher margin activities. This propelled shares higher from $30 in 2006 to $106 in 2016.
Despite a nice bolt-on deal, although the $233 million price tag was somewhat higher late 2016, I had to conclude that valuations and thus expectations were too high for me to consider. After all, the company was earning little over $4 per share, translating into a 26 times multiple. Following that latest deal, net debt would inch up to about three quarters of a billion, for a leverage ratio just shy of 2 times.
That leverage ratio, modest growth, a 26 times multiple and already high margins make the upside seem limited to me, despite a great track record. Since late 2016, the cautious thesis seemed warranted as shares fell to $85 early 2017, rallied to $140 later that year, as shares were back to $106 early 2019. Ever since, shares steadily rose toward the $150 mark in recent weeks, before falling back to $123 currently amidst the current fears related to the coronavirus crisis.
Fast forwarding to today, we see a company in 2019 which reported sales of $2.5 billion, up 20% from the situation late in 2016. Some further margin gains, sales growth and some share repurchases allowed earnings to rise from little over $4 late 2016 to GAAP earnings of $7.15 per share last year. Adjusted earnings did come in even twelve cents higher.
This means that at a recent high of $150, shares trade at 21 times earnings, and at $123 currently, that multiple compressed to 17 times, obviously because investors fear a bad upcoming year even though the company already guided for essentially flattish earnings in 2020.
Leverage is no issue either. The company ended 2019 with $370 million in net debt, with another $300 million in environmental liabilities and post-retirement liabilities appearing on the balance sheet. With the company reporting EBIT of little over $400 million in 2019, the EBITDA numbers come in above $500 million, resulting in very modest leverage ratios of course.
Share of Curtiss-Wright look quite compelling as valuation multiples have contracted; the company continues with its practice of bolt-on dealmaking and leverage is no concern at all. Compared to 2016 and the recent highs, valuation multiples have fallen from 26 and 21 times earnings, respectively, to about 17 times earnings.
The issue with that is the guidance as the company is actually guiding for modest sales growth to about $2.6 billion this year, as GAAP earnings will be stagnant amidst some higher restructuring costs, although the company believes that adjusted earnings should continue to grow.
Even though issued just a few days ago, realize that there is probably some uncertainty surrounding the 2020 guidance, with probably some real risks to the lower end of the guidance. Hence, I am performing a balancing act here. I believe that the company is a quality name with a sound strategy, although exposure to some (power/energy) markets can be questioned.
Nonetheless, shares have increased a factor of about 30 times in as many years, resulting in good returns for long-term investors, although investors cannot look froward to high dividends.
While the current near-20% retreat is compelling, the entire market has sold off by nearly similar percentages, thereby not creating a specific bargain for the shares vis-a-vis the market. Nonetheless, this might be a reasonable point to buy some shares, provided you have a long-term outlook, although I am not aggressive here as opportunities arise left and right.
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This article was written by
The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.As the leader of the investing group Value In Corporate Events they provide members with opportunities to capitalize on IPOs, mergers & acquisitions, earnings reports and changes in corporate capital allocation. Coverage includes 10 major events a month with an eye towards finding the best opportunities. Learn more.
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