Goodrich Is a Quiet High Flyer

12/12/2007 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of the Forbes Growth Investor, says the former tire maker has become a leading supplier of components for commercial and military aviation.

Goodrich (NYSE: GR) is a supplier of aviation components and systems used in large commercial, regional, business, and military aircraft. In the third quarter, 33% of its sales were for original equipment (OE) (i.e. new aircraft); 37% for refurbishing aircraft in the aftermarket, and 26% for defense and space programs.

Actuation and Landing Systems (ALS) is GR’s largest segment, generating 37% of sales for the first nine months of 2007. Offerings include flight-control systems, landing gear, wheels and breaks, and various engine components. It also makes main and tail rotors for helicopters.

Nacelles and Interior Systems (NIS) accounted for 34% of sales. Nacelles house the aircraft engine, and its components include thrust reversers, cowls, nozzles, and exhaust systems. Interior products include seats, lighting, cargo-handling systems, evacuation slides and life rafts, and military aircraft escape systems.

Electronic Systems produced 28% of sales. These systems generate flight performance data, aid flight and fuel management, monitor electrical systems, and produce safety information. It also makes intelligence, surveillance, and reconnaissance systems.

Suppliers in the aerospace and defense sectors have been benefiting from growing commercial airline traffic, increased defense spending, and aging equipment. Airlines worldwide are expanding fleets and carrying out delayed refurbishment programs. GR is also a major supplier for newer airplanes including the Airbus 380, Boeing 787 Dreamliner, Embraer 190, and Dassault Falcon 7X.

In addition to upgrading aging military equipment, GR is a supplier to high-growth defense categories including helicopters and intelligence, surveillance, and reconnaissance. Furthermore, at least some of GR’s recent growth was due to increased market share and airlines increasingly outsourcing work.

In the third quarter, net sales increased 14.8% year-over-year to $1.60 billion. The pro forma operating profit margin widened [almost one percentage point] to 13.40%, thanks to increased sales, a favorable product mix and improved efficiencies. Net income jumped 25.9% to $126.8 million, or 99 cents per share.

GR’s largest customers include Airbus and Boeing, [which generated] 17% and 14% of 2006 sales. The US government was responsible for 15% of sales. Unexpected weakness in air travel or defense spending could lead to order cancellations and reductions. Boeing recently announced delays in its 787 deliveries, but management says GR’s product deliveries for the program largely remain on schedule.

Favorable industry trends and GR’s healthy backlog suggest sales will continue [to be] high for at least the next several years. For 2008, management projects approximately 11% year-over-year organic sales growth and up to 16% earnings per share growth. Management recently raised its full-year 2007 earnings guidance to $3.65-$3.70 per share, from its previous guidance of $3.50-3.60.

(The stock closed below $73 Tuesday, not far off its all-time high—Editor.)

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