From Developing to Producing, and Commercial Jets
Rockwell Collins develops communications and aviation electronics for commercial and military customers worldwide with 20,000 employees. One of its most important customers is the US Department of Defense, where the company expects to transform form a developer into a producer. The change of roles will help to offset the consequences of The Sequester. For the time being, in addition to a slow demand from the DoD, the company announced a weak sale of business jets.
Current performance for Rockwell Rollins will manifest in the form of lower sales and weak earnings for the short-term. Nonetheless, overall performance continues to improve year-over-year. For shareholders, stock value has increased through the year thanks to a steady buyback policy that has not eased amid difficulties. The policy is an evidence of the confidence manifested by management concerning fiscal 2015’s performance and beyond. Firm representatives argue that multiple platforms will increase the number of sales. Here, is when international exposure comes to play as higher sales are expected from worldwide clients like Embraer, Airbus, Bombardier and Mitsubishi.
The most important characteristic for Rockwell Rollins is its market leading position as a global communications and avionics equipment supplier, for commercial and military customers. In other words, even though the U.S. military may halt developments of fighter jets, or cargo planes, there remains an important civil market. Also, in the commercial business jets market, activities tend to rise through economic difficulties. That market behavior has helped the firm to offset current shortcomings due to current U.S. regulation. Additionally, the developing phase of new commercial airliners offers the company a good mid-to-long-term outlook.
The positive prospects for the Rockwell Rollins have been backed by purchases through the current year by Jeff Ubben and John Burbank, the two gurus holding the largest positions in the company. The stock is currently trading at 16.1, carrying a 17% discount to the industry average. Given the opportunities in the commercial jets segment, and expected company transformation in the military segment, I share the optimism of the aforementioned gurus.
The International Market May Save You, Just Not Yet
L3-Communications is a leading high-technology products, systems and subsystems provider for defense electronics. Performance indicators for the last quarter have shown improvements year-over-year due to international sales. However, the company has reached maturity as a defense contractor. In consequence, future prospects are dim to dark due to its heavy dependence on the department of defense, the government agency responsible for 71% of the sales completed in 2012.
International exposure for L3-Communications is considerably lower than that of Rockwell Rollins. Only its C3ISR, a system for secure communication between different platforms, that represents around 27% of sales, is the only product with relevance for the international market. Growth can also be driven by an aging armed forces fleet, but the sequester will have to be lifted first, and the segment represents 19% of sales.
The gross of sales made by L3-Communications comes from electronic systems (43% of sales), a segment that suffers from recurring cycles. Hence, while the segment has pushed growth since the early 2000s, it has been so because of the simultaneous occupation of Iraq and Afghanistan. Hence, a year-to-year decline in orders is not surprising. The good news is the 14% increase of non-department of defense orders, and a 16% increment in international revenue. Both figures evidence the company’s overall diversification.
Financially, L3-Communications is strong. Nonetheless, the guru holding the largest position, Richard Pzena, registers no transaction since September 2012. James Barrow, who follows Pzena, has been reducing his holding since 2011, the when stock price began to rise. I share their optimism, even with the stock trading at 11.3 times its trailing earnings, and a 42% discount to the industry average.
The Civil Market
I prefer Rockwell Rollins before L3-Communications because of its wider international presence, and strong prospects in the commercial jets segment. Both characteristics provide the firm with enough weight to offset the sequester and fuel future prospects. Last, gurus continue to show enough confidence to feel bullish about the stock.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
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