Two Board Members are Buying this Stock
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Woodward Inc. (NASDAQ: WWD) is an industrial goods company that provides control and optimization systems (such as valves and pumps) for aerospace and energy customers. In the first two days of August, Board member Paul Donovan bought 9,500 shares of stock in Woodward at an average price of $32.97 per share. This attracted our attention because insider buying is statistically a bullish signal, since when an insider buys stock they are forgoing an opportunity to better diversify their investments.
Donovan’s activity coincided with a smaller, but still considerable, purchase by fellow Board member Gregg Sengstack. Sengstack purchased 2,500 shares on Aug. 2at an average price of $32.75. Multiple insiders buying a stock is a particularly strong bullish signal, as companies in which this occurs tend to outperform the market in the future. Woodward has slumped 17% this year; in the last three quarters it has missed earnings expectations twice and exactly met them once.
The only hedge fund with ownership above $6 million in Woodward, according to our database of 13F filings with the SEC, was Chuck Royce’s Royce & Associates. Royce owned 4.7 million shares of the company at the end of March, roughly the same position that the fund has owned ever since the end of 2010. Billionaires Jim Simons and Israel Englander had small positions in the stock as well.
In Woodward’s third fiscal quarter, which ended on June 30, the company reported a 5% increase in revenue compared to the third quarter of the last fiscal year. However, costs rose more quickly -- including a nearly 30% increase in R&D costs -- and falling margins pulled the company’s earnings per share to 40 cents, down from 51 cents in the same period of the prior year. This performance was a slowdown compared to the first half of Woodward’s fiscal year. Over the first nine months the company has seen its revenue increase by 9% and its earnings per share rise by 5%. The energy segment has led Woodward’s growth, but the aerospace segment has seen its revenue grow over the first three quarters of the fiscal year as well.
Woodward currently trades at a trailing P/E of 18 and at 14 times forward earnings estimates, which is about fairly priced for a slowly growing company with a very low (about 1%) dividend yield. Investors should also note that the stock’s beta of 1.7 means that it is exposed to fluctuations in the broader market.
The company’s two closest peers are Parker Hannifin (NYSE: PH), which provides hydraulic and flow control systems to industrial and aerospace customers, and Westinghouse Air Brake Technologies (NYSE: WAB), which provides pneumatic devices, heat exchanges, and other products to railroads, manufacturers, and utilities. Parker Hannifin trades at considerably lower multiples than Woodward -- a trailing P/E of 11, a forward P/E of 10 -- grew its earnings in the last quarter compared to the same period the previous year, has beaten earnings estimates in the last two quarters, and pays a slightly higher dividend yield of about 2%. Like Woodward, Parker Hannifin is exposed to demand from aerospace customers, but it seems better priced for this risk. Westinghouse has been growing its earnings recently and trades at 17 times trailing earnings, and so seems to be even with Woodward on a value basis and beating it on a growth basis.
Another competitor, Hamilton Sundstrand, is a business unit of United Technologies (NYSE: UTX) and accounts for about 10% of its parent’s revenue. United Technologies’ business has been fairly stagnant compared to last year but it trades at 16 times trailing earnings and pays a 2.8% dividend yield. We see a number of positive traits in Woodward’s peers -- perhaps they might make good buys as well -- but we like to see a consensus of insider buying and that’s exactly what Woodward is offering.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. 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. If you have questions about this post or the Fool’s blog network, click here for information.