Woodward Stock: Long-Term Outlook Remains Strong Despite Recent Drop (NASDAQ:WWD)

In June, I treated Woodward (NASDAQ: WWD) with a Buy rating and a $203.67 price target attached to the stock. However, after the release of third-quarter earnings, the stock lost nearly 7% of its value. In this report I will discuss reasons for share price declines and update my price target and rating.

Woodward’s earnings rise as sales growth slows

Woodward posted a 6% increase in sales to $848 million, and while this indicates a slowing growth rate, it should also be noted that comparable periods last year are stronger. So it’s hard to keep the same sales growth rates. However, we saw net earnings grow at a strong 21% rate, driven by volumes, sales mix and pricing adjustments, while free cash flow doubled to $230 million.

Commercial aerospace sales to OEMs were up 2%, and that’s not a huge growth rate, but it reflects supply chain pressures that have forced OEMs to slow down production acceleration for some commercial jet programs. Woodward is not the bottleneck in the supply chain, but the state of the OEM supply chain is affecting their sales. Aftermarket sales continued to experience significant growth as revenue increased 19%. For the defense segment, the picture is much the same, with OEM defense sales down 4% due to delays in some programs, while aftermarket revenues rose 22%. For the aerospace industry as a whole, this led to sales rising 8% to $518 million, or 61% of sales, from 60% last year, while earnings rose 23% to $102 million, margins improved significantly from 17.3% to 19.7%. This is driven by price adjustments, volumes and several higher aftermarket sales in the mix.

The industrial segment, which consists of Power Generation, Transportation and Oil & Gas, saw sales increase 3% to $330 million and earnings rose from $58 million to $60 million. dollars, on margins that were slightly lower. Power Generation sales rose 8% as growing demand for backup power for data centers and global energy demand supports the business. Shipping sales increased 3% due to higher shipbuilding rates as well as higher marine vessel utilization. This was somewhat offset by lower demand in China for LNG trucks. LNG truck sales in China are difficult to predict, and the latest indication is that while the company expected third-quarter sales to decline with a pick-up in the fourth quarter, fourth-quarter sales will be even weaker, because there is inventory reduction activity. Sales in the Oil & Gas segment fell 6%, driven by investment pressure on lower gas prices.

So overall, the aerospace OEM business is affected by supply chain issues, with aftermarket sales still trending strongly. On the industrial side of the business, power generation and grid solutions are still seeing good sales growth, as are marine solutions, but sales of oil and gas and LNG trucks in China are fluctuating.

Woodward revises downward orientation

The guide pretty much shows why Woodward’s stock is down. In April, the company raised its guidance for sales and free cash flow and almost had to return to that guidance in July. The company now sees sales in the range of $3.25 billion to $3.3 billion, which is down $50 million from the high end, which coincides with previous guidance. Free cash flow growth also reversed and now stands in the $300 million to $350 million range, which was also in line with what the company had proposed in January. The reason for cash flow pressure is the timing of cash collection. Due to delays in the aerospace supply chain, some cash collection will slip into FY25 and lower orders in support of Chinese LNG trucks, sales guidance also had to be adjusted.

It shows quite clearly the risk and uncertainty facing Woodward in the aerospace supply chain and the uneven demand for LNG trucks from China. While I can understand that the guidance revision has put pressure on the stock price, we should keep in mind that margin and sales expansion opportunities driven by higher OEM build rates are still present and should be a factor in the long term long for business.

Woodward stock remains a buy

To determine multi-year price targets, the Aerospace Forum developed a stock analysis tool that uses a combination of analyst consensus on EBITDA, cash flows and the latest balance sheet data. Each quarter, we revise those assumptions and stock target prices accordingly. In a separate blog we detailed our analysis methodology.

For Woodward, EBITDA estimates are down 2% between 2024 and 2026, which is driven by uncertainty over LNG truck sales from China. Free cash flow for the year has been revised down 8.7% due to aerospace supply chain issues, which will result in lower cash flow in 2025, but also reflects additional investment to stabilize the supply chain. In addition, it appears that the share buyback program that was announced earlier this year will primarily offset the dilutive impact going forward. So any positive contribution from share buybacks has also been removed from our share price estimates. The stock appears to be fairly valued at a median company EV/EBITDA estimate and offers an upside of around 7% given FY2025 earnings. Given the long-term growth in production rates, I think a price target between the company’s median and the peer group is fair. This would result in a price target of $185.79 with an upside of around 13%. So, I maintain my buy rating as I believe the stock is ahead measured against FY25 earnings and should be even higher after that.

Bottom line: Woodward remains attractive despite FY2024 slippage

The latest earnings show quite clearly the strengths of the business as well as the challenges facing the supply chain and demand side of LNG trucks. This will lead to somewhat weaker FY24 results and the share price accordingly. However, I believe that in the coming years and in the medium to long term the stock continues to provide value to investors. As a result, I reiterate my Buy rating on Woodward with a price target of $185.79.