Rockwell Collins Is a Solid Option for Uncertain Times
Since at least the Reagan Era, it has been traditional for presidential candidates to emphasize optimism. Political slogans over the past four decades have included "Morning in America," and "Yes, we can."
This year, listening to some politicians, you'd think we were living in a Mad Max movie. Small wonder that investors are spooked and looking for any excuse to run for the exits. But paradoxically, stocks keep hitting new highs as they did Wednesday after several companies beat earnings. The Dow Jones Industrial average fell slightly Thursday but remains above the 18,500 mark. But companies are benefiting from low expectations, making it easier for them to exceed earnings forecasts and for traders to justify their bullishness.
Still, the momentum is precarious, which is why Rockwell Collins (COL) is a great defensive growth play. The Cedar Rapids, Iowa-based, global provider of avionics is scheduled to release operating results next Monday. The company has beaten earnings estimates six of the last eight quarters. Rockwell Collins will likely give you a post-earnings "pop" and safe double-digit gains.
Shares have bumped up and down over the past year. They fell more than a percent in Thursday trading to finish at $85.73. The average analyst expectation is that Rockwell Collins will reach $95.56 over the next 12 months, for a gain of roughly 10%.
Rockwell Collins doesn't get much press; you won't hear CNBC analysts hyperventilating about its prospects. But you're also unlikely to see it get bad-mouthed and shorted. That's good news at a time of social, economic and political unrest -- one where another Brexit-like event is not out of the question.
Such Steady-Eddie stocks can provide growth and ballast, which is exactly what a portfolio needs now.
The average analyst consensus is that earnings per share (EPS) will come in at $1.58, compared to $1.33 in the same quarter a year ago. Wall Street expects continued earnings momentum. EPS for the third quarter is projected at $1.61, compared to $1.38 in the same quarter a year ago. Full-year EPS is estimated at $5.50, versus $5.19 last year. For fiscal 2017, full-year EPS is projected at $5.76.
One of the most reliable methods of racking up capital appreciation is to buy a stock with multi-quarter earnings momentum and that describes Rockwell Collins.
With a market cap of $11.31 billion, Rockwell Collins is helping aircraft makers and operators upgrade their equipment to maintain system interoperability and the exchange of real-time information among ground controllers and pilots.
Rockwell Collins is in a good spot to take advantage of an unstoppable, lucrative trend in aviation: The FAA's blueprint to revamp the National Airspace System (NAS) from now until 2025. Officially called the Next Generation Air Transportation System, or "NextGen," the FAA's NAS upgrade uses the GPS technology found in cars and smartphones. NextGen is intended to replace the increasingly outmoded radar-based national air traffic control system in place since the end of World War II.
Despite the rancor and gridlock today in the U.S. Congress, NextGen remains a bipartisan federal priority, and there is little doubt that it will come to fruition. It will likely lead to lasting profits for Rockwell Collins and other companies that make complex cockpit electronics that are in sync with the new grid.
A related growth driver is the imperative of controlling aircraft emissions that contribute to global warming. According to the Air Transport Association (ATA), updating the nation's outmoded Air Traffic Control system will improve aircraft fuel efficiency and reduce the air transport industry's emissions by 10% to 15%.
The ATA has determined that NextGen's Air Traffic Management solutions, such as better flow control and more efficient approaches to airports, could reduce aircraft fuel burn by as much as 12%.
Another tailwind for Rockwell Collins is the resurgence in commercial aviation, as consumers buy more tickets and aircraft OEMs such as Boeing market advanced jets to developed countries as well as to growing emerging markets with rising middle classes.
Rockwell Collins is a pioneer in engineering sophisticated electronics for the aircraft cockpit. The firm enjoyed a major coup by getting selected to provide the avionics for Boeing's game-changing 787 Dreamliner, a passenger airliner constructed of lightweight and ultra-durable carbon composites.
Rockwell Collins also benefits from diverse revenue streams, with its business divided between the military sector (60%) and commercial (40%). Fear of terrorism is fueling secular growth in the global aerospace/defense industry, a boon for the company.
Rockwell Collins's trailing 12-month price-to-earnings ratio (P/E) stands at 17.31, cheap compared to the trailing P/E of 19.46 for avionics rival Honeywell International. To be sure, the latter company is a solid, blue chip investment, but it provides a wide range of other electronic products, making it less of a pure play on the potential growth in avionics.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, Persinos held stock in Boeing.