We reaffirmed our long-term Neutral recommendation on
Rockwell Collins, Inc.
) on Apr 11, 2013. We remain upbeat on the company's balanced
exposure to both types of customers, namely, commercial and
military, as well as its strong balance sheet. However, risks
associated with the reliance on international sales, high
exposure to fixed price contracts and high research &
development (R&D) overhead keep us on the sidelines.
Headquartered in Cedar Rapids, Iowa, Rockwell Collins is the
leading global supplier of communications and avionics equipment
for both commercial and military customers. This helps the
company to utilize government funds for the development of
products for the dual-end market.
The dual-end market leads to higher volume sales, which create
economies of scale in cost-sensitive government contracts. In the
near term, the Surface solutions portfolio will shore up demand
from military customers, while recovery in the business and
regional jet market will boost commercial sales.
Again, it strong balance sheet and ongoing share repurchase
program add visibility to the story. Rockwell Collins has a
strong balance sheet among its peers with a low long-term
debt-to-capitalization of 37.1% as of Dec 31, 2012 (Zacks
industry average was 43.9%). The company continues to be a strong
cash generator with $63 million of positive cash flow in the
first quarter that came in ahead of the company's expectations.
Meanwhile, Rockwell Collins generated 93% of revenues in fiscal
2012 from fixed priced contracts, exposing the bottom line to
cost over-runs. As a result, the company will be able to make a
profit only if costs stay under the contracted price.
Moreover, a large percentage of Rockwell Collins' business is
generated outside the U.S. (33% of sales in fiscal 2012). As most
of the company's products are of dual-use (military and
commercial), acceptance of contracts are governed by laws,
regulations and policies of the U.S. government.
Rockwell Collins operates in an industry requiring substantial
investment in R&D expenditure. In fiscal first quarter 2013,
R&D expenditure was $227 million (21.4% of sales).
The Zacks Consensus Estimate for the fiscal second quarter of
2013 is $1.16 per share, representing a year-over-year increase
of 6.8%. For fiscal 2013 and 2014, the Zacks Consensus Estimates
are $4.58 and $4.90 per share, up an estimated 3.9% and 6.9%,
Other Stocks to Consider
Rockwell Collins expects to report its fiscal second quarter 2013
on Apr 19, 2013. The company currently retains a Zacks Rank #3
(hold). Other stocks worth considering are Zacks Ranked #2 (Buy)
Wesco Aircraft Holdings, Inc.
FLIR Systems, Inc.
Triumph Group, Inc.
ROCKWELL COLLIN (COL): Free Stock Analysis
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TRIUMPH GRP INC (TGI): Free Stock Analysis
WESCO AIRCRAFT (WAIR): Free Stock Analysis
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