2 for Tuesday: Goodrich Looks Like a Good Bet

Goodrich(GR Quote) deserves a second look. At Monday's closing price of $27.43, the stock of this well-known aerospace component maker is now trading in the lower half of its 52-week range. However, it has a terrific balance sheet and solid prospects for future earnings growth.

Consider the following:

• Despite the doom and gloom surrounding its aerospace business, particularly in light of the Sept. 11 plane hijackings, the company managed to grow revenue in each of its core aerospace businesses in the fourth quarter. Those core businesses include technical services, landing systems, engine and safety systems, and electronics systems.

  In part, the company attributed that growth to winning some new contracts, such as a deal to provide landing gear for the new "joint strike fighter," potentially worth $4 billion to $5 billion over several years. Another factor was the contribution of several acquired companies, although the exact breakdown wasn't quantified by management.

• The company has traded between 5 and 26 times trailing earnings over the past five years. But now it trades at just 8.5 times trailing earnings, compared with an industry average of 16.2. On a price-to-sales basis, Goodrich has traded anywhere from 0.3 to 1.2 times sales during that same time frame. It now trades at 0.65 times sales, vs. the industry average of 0.80.

  The Stock Goodrich (GR:NYSE)
  Recent Stock Price:	$27.43
  52-Week Range:	$15.91-$44.50
  P/E Ratio:	16.25
  Market Capitalization:	$2.66 billion
  Float:	62.2 million shares
  Short Interest Ratio:	3.55
  Institutional Ownership:	70%
  Source: Yahoo! Finance

  On a price-to-book-value basis, Goodrich has traded anywhere from 1 to 3.9 times book. It presently trades at 1.8 times book value, and the industry average is 2.9 times. This price-to-book number tells investors that their money buys more in terms of both sales and earnings at Goodrich than at its aerospace and defense counterparts. In other words, it's darn cheap.

• The sell side is optimistic that Goodrich can reasonably generate double-digit bottom line growth over the next five years as demand for commercial travel and defense-related goods increases and the economy rebounds. This assumption also takes into account management's cost-cutting initiatives and their impact on margins, as well as company stock repurchases and the proposed spinoff of its Engineered Industrial Products business.

• On Sept. 17, Goodrich's board of directors authorized the repurchase of up to $300 million of Goodrich common stock. During the fourth quarter, the company bought back almost 300,000 shares at an average price of $25.31. The mere fact that the company is willing to spend its money buying back equity rather than plunging it back into the business is a terrific sign, to me, that better times lie ahead.

• Insiders have been buying the stock in bulk. Since Sept. 11, officers and directors of the company have bought more than 200,000 shares in the open market at prices ranging from $16.80 to $25.60. Before Sept. 11 and the subsequent drop in the stock's price, insider activity was almost nonexistent in 2001. Of course, this activity is no guarantee that the stock is headed higher. But it sure is nice to know that insiders have an incentive to enhance value for the common shareholder.

  The Stats
  Year	Revenue (in billions)	EPS
  2000	$4.363	$2.97
  2001	4.185	3.14
  2002*	4.020	2.67
  2003*	3.660	2.44
  *Thomson Financial/First Call estimates. Source: Company reports

• In conjunction with its fourth-quarter earnings, the company said it's comfortable that it can earn between $2.45 and $2.55 per diluted share in 2002. That's down from the $2.87 it earned in 2001. However, this assumption includes a fairly conservative industry outlook for 2002. Management's forecast accounts for the fact that both Boeing(BA Quote) and Airbus have trimmed production, and Goodrich makes parts that go into their planes. The forecast also considers that airline capacity reductions will lead to a 10% decline in aftermarket products sales from 2001, affecting all of Goodrich's businesses from landing systems to tech services.

• As a bonus, the stock carries a dividend of $1.10 a share. That's an annualized yield of more than 4.2%!

With that in mind, potential investors should understand that there is one caveat: asbestos litigation.

Goodrich's Engineered Industrial Products segment, which represents about 14% of total sales, has been sued for its alleged role in asbestos-related injuries, along with about 20 other defendants. According to a Jan. 29 press release concerning its asbestos claims, the company's chief financial officer, Ulrich Schmidt, commented that Goodrich has $1 billion in insurance coverage and that he believes there is "enough insurance in place to handle whatever claims are filed."

However, as part of an effort to limit its liability, Goodrich announced that it plans to spin off this segment to shareholders sometime during the second quarter. That spinoff will most likely happen, although how much the liability could hurt it isn't quantifiable. Nevertheless, this action should limit Goodrich's exposure. In addition, management has said that its cash flow is sufficient to cover any such asbestos-related expenses.

Bottom line: The company's officers and directors seem to think the stock is worth the risk, and Goodrich is quite cheap in comparison with historical standards. So if you've got the means and the risk tolerance, I think the stock is worth a look at current levels.

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