Flying High

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Santa is still offering gifts into the run up to next week.  While one can expect trading volumes to lighten as 2013 approaches, there is still a surprisingly high level of buying supporting this market, despite Fiscal Cliff concerns.

One stock appealing to buyers is Esterline Tech Corp (NYSE: ESL). The company operates within the engineered products and systems for the aerospace and defense industry.  It is a stock which has largely flown under the radar in 2012. It peaked at $82.28 in 2011 and subsequently went to almost half in price later that year.  Since then, it has muddled along until it popped onto my radar.

During this time of reflection, the company has been coming in around analyst estimates in a relatively unspectacular fashion, until recent Q4 earnings saw a significant jump when the stock came in well ahead of analyst expectations.   The $1.97 per diluted share exceeded the prior year Q4 by over 70 cents.  Brad Lawrence, CEO, went on to say "Esterline is in a healthy position, poised for another strong year", guiding for $5.45-5.80 for fiscal 2013.  However, it hasn't all been smooth running for Esterline; as recently as August the company had cut earnings projections for 2012 because of a $52 million charge against its Racal Acoustics defense business.

So what are the expectations for Esterline in 2013?

With military actions ongoing in Afghanistan, but NATO and US involvement likely to ease further into 2013, there will be greater emphasis on relief and support services as the withdrawal continues.   In that regard, a potential order for (military transport) C-130 cockpit retrofits would fit with this dynamic, but given the uncertainty of the order (or for who it's for; in 2009 the Chilean Air Force had its C-130 avionics upgraded by Esterline), it hasn't been factored into Esterline's 2013 guidance.   The US Navy's Boeing P-8 is set to go into operation into 2013, with plans for the Navy to buy 117 planes.  The initial production rollout was for 13 planes, but this should deliver ongoing revenue for Esterline as the order is filled out.  Palomar Products, bought by Esterliene, is responsible for the Intercommunications Systems in the P-8.  However, Boeing (NYSE: BA) had a more mixed view on U.S. Defense spending, with a drop in domestic demand offset by increased international demand.  The latter accounted for 30% of Boeing's Defense revenues.  Certainly it's an area Esterline can look to benefit from.

The commercial aerospace arena is also a tricky environment, but was mentioned as a growth opportunity by the CEO.  However, troubles in the global economy have forced commercial aviation companies to delay upgrades and/or orders for replacement aircraft.  In the commercial space, Esterline provides avionics to commercial transport aircraft such as the B747, DC-10 and MD-80, but it's unclear what of the newer commercial jets carry their technology?   

Certainly, older planes will fast be replaced with newer more fuel efficient models.  For example, aviation players like Fed Ex are decommissioning their entire MD-10-30 fleet (albeit, a small portion of their total fleet), to replace them with B767 cargo jets; the first sold by Boeing this year.   However, the avionics for the B767 is not supplied by Esterline, but comes from Honeywell.  Boeing has described the near term market for air freight as 'soft'.  In addition, a $1.9 billion order, including five B747-8 freighters, for Boeing was cancelled.

However, Boeing hasn't felt the pinch too hard, as it has consistently come in ahead of earning estimates in the last seven quarters.  Boeing are also "positive" on their growth forecasts. A $1.9 billion hit doesn't read so bad when the company has $307 billion order backlog, with a diversification not seen before as two thirds of the orders coming from outside the U.S. and Europe.  So there are opportunities where Esterline may be able to benefit.  If Esterline is to make inroads into the commercial sector, it's likely going to have to squeeze Honeywell out of its well established lock on Airbus 320,340 and 380 markets, in addition to its Boeing coverage of 717, 747-400, 757/767, and 777.  A tall order, but not impossible.  For the near term, Esterline's focus will likely remain on its Defense contracts, but buyers seem happy to accumulate at current prices. 

fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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