If you are looking for exposure to the defense sector with some leverage to economic growth, you might be in the mood for Moog (MOGA) .
Founded in 1951, Moog began with an original patent for the electrohydraulic servovalve, a device that helped control the flight of America's earliest missiles and rockets. Today, Moog makes a range of products that address the precise control requirements of spacecraft, aircraft, jet engines, missiles and industrial machinery. This New York-based precision manufacturer is focused on the defense business but, as the economy recovers, there may be significant upside from other commercial business lines. For investors, the trick is finding the right entry point.
Moog shares have had a nice run in 2003, especially in the second half of the year as investors focus on companies that can benefit from an increase in defense spending. And Moog's involvement in advanced military aircraft programs has provided a nice catalyst. "The company's military business continues to deliver strong results mainly driven by growth in development work of the F-25 Joint Strike Fighter and some growth on other military production programs, the F-15 and F-18," noted Credit Suisse First Boston defense analyst Adam Weiner. (Weiner rates Moog shares nuetral, and Credit Suisse First Boston expects to seek an investment banking services deal with the firm in the coming months.)
Military sales to the U.S. government and military-related sales to
represent about one-third of Moog's total sales. The company should see benefits from a renewed focus on the military as a result of the Iraqi conflict. Not only is the F-35 contract key to the company's future success, new work in both the F-15 and F-18 programs should provide a boost.
In addition, about 15% of the company's business comes from satellite and launch vehicle controls, including missile assemblies. That business, which has struggled recently, also should benefit from a program to replenish U.S. defense stockpiles as well as additional potential for new-product development. History suggests conflicts -- like the ongoing one in Iraq -- almost always lead to a push for new innovations in defense technology. While it's a relatively small player compared with the giants of the missile business, Moog would certainly stand to benefit from increased innovation and spending.
Finally, it's hard to predict the future of the space program but Moog is a player in that market as well. And the fact that nearly 40% of Moog's sales are made in international markets suggests the company stands to benefit -- at least at the margins -- from the continued foreign thirst for aerospace technology.
While one can reasonably argue that much of the defense build-up may already be priced in Moog shares, there is also the potential for growth in the company's commercial businesses as the economy improves. Moog sells to Boeing's defense arm and its commercial side, as well as other civil aircraft manufacturers. As the economic cycle improves so too should Moog's civil aviation business, something that could begin to have an effect on both revenue and profit as early as next year.
As one of the premier flight control system designers and manufacturers in the aircraft business, the company's client list is impressive. On the business-jet side, Moog does work for
. And it sells to both
and Boeing on the commercial side.
Moog also would benefit from an uptick in the industrial economy from its capacity to manufacture control devices for precision fabrication and manufacturing equipment to its division that makes components for power turbine manufacturers. In fact, the industrial controls group -- which includes a defense component -- comprised nearly 35% of the company's 2002 sales.
Acquisitions and Debt
The company has also been quite successful in growing its stable of products and services through acquisition. Most recently it acquired a division from
that focused on motion control and data transmission equipment. In conjunction with the deal, the company issued 1.75 million shares of stock in September.
Past acquisitions have been made with both equity and debt, which has increased Moog's debt burden over time. Currently at approximately 43% (net debt to total cap), debt is not overly burdensome but it does put some limits on flexibility for future acquisitions. Moog's cash flow should allow debt to be reduced in the coming quarters.
Moog, with its fiscal year ended Sept. 30, will report fourth-quarter and fiscal-year 2003 results today. Earnings should come in around 75 cents a share for the quarter and $2.75 for the year. For the coming year, assuming an improving economy, the company should be able to post earnings of about $3.25 a share, suggesting the stock is currently trading at a multiple of about 13 times next year's earnings. That isn't terribly cheap, but isn't overly expensive for a company that can grow earnings at about 12% to 15% a year. And the prospects for longer-term growth appear good.
I'm not the type to chase a stock ahead of an earnings call so I'm content to wait until it comes back under the $42 range to buy, understanding I could miss an upbeat conference call and appreciation. However, for patient investors, Moog's business lines appear to expose the company to above-average growth in the coming years. Moog gets three barrels.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to