We have maintained our Neutral recommendation on
Rockwell Collins Inc.
) on May 3, 2013 based on its second quarter 2013 results and
effective cash deployment strategy. The positives are partially
offset by the effect of sequestration and the uncertainty related
to the defense budget spending. The company currently has a Zacks
Rank #3 (Hold).
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Why the Reiteration?
Rockwell Collins is the foremost global supplier of
communications and avionics equipment for both commercial and
military customers. Its balanced exposure to both types of
customers allows the company to use government funding to develop
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.
The company's original equipment manufacturer market has revived
with rising airplane deliveries at Airbus and
The Boeing Company
). Therefore, the company is witnessing a rejuvenated business
jet market with rising original equipment and improving
aftermarket fortunes. Also, the company provides niche equipment,
which has a captive market until the retirement of the specific
Recently, Rockwell Collins reported fiscal second quarter 2013
results with earnings beating the Zacks Consensus Estimate on the
back of the company's share repurchase program. Earnings were
also up 7% on a year-over-year basis.
Furthermore, a strong balance sheet, incremental dividend and an
ongoing share repurchase program add visibility to the story.
Management has rewarded shareholders by returning a substantial
portion of its free cash flow through share repurchases and
incremental dividends over the years. During the second quarter
of 2013, the company repurchased 1.4 million shares of common
stock at a total cost of $84 million. Recently, the company's
Board of Directors had approved the repurchase of its common
stock worth $500 million.
However, these positives are offset by the U.S. government's
delayed funding authorizations, program execution risk,
dependence on international sales, high exposure to fixed price
contracts and high research & development overhead.
Other Stocks to Consider
Stocks worth considering in the space are
Esterline Technologies Corp.
), both with a Zacks Rank #2 (Buy).