Despite growing earnings per share by 24%, Rockwell’s stock is near its 52 week low. Rising fuel costs and possible airline reductions continue to worry analysts and thus have punished the stocks. Despite analysts worries, Rockwell appears to be trading at a discount and currently appears on the magic formula screen.
Magic Formula Numbers
Currently, Rockwell appears on the magic formula screen for the top 50 companies with a minimum market cap of 1000 million. According to magicformulainvesting.com, Rockwell has a pre-tax earnings yield of 12% and pre tax return on capital between 50-75%.
Business Profile According To Yahoo Finance
“Rockwell Collins, Inc. engages in the design, production, and support of communications and aviation electronics worldwide. It operates in two segments, Government Systems and Commercial Systems.The company was founded in 1933 and is headquartered in Cedar Rapids, Iowa. Rockwell Collins Inc. (NYSE:COL) operates independently of Rockwell Automation Inc. as of June 29, 2001.”
More Numbers
Since 2001, ROE averages about 32% with ROA averaging about 11%. Rockwell currently sports a price-to-earnings ratio of 12, which is well below its average of 21.
Commentary
This will be my second position in the Aerospace/Defense industry alongside with Boeing (BA). there are many investors who will not invest in two stocks in the same industry, I am not one of them. Both companies appear to be trading at a discount and both company’s have above average return on capital. According to MSN Money, Rockwell has return on capital of 29 versus Boeing’s return on capital of 16. I expect Rockwell to grow faster than Boeing as it is a much smaller company with more room to grow. Finally, very little due diligence was done on Rockwell so do not take it as a final buy decision. My approach is 100% mechanical with almost no fundamental analysis done.
Disclaimer: I have buy order on Rockwell Collins (COL) and own Boeing (BA).
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{ 5 comments… read them below or add one }
Interesting analysis. Initially I would be skeptical about anything related to aerospace/defense first because US airlines are enduring a tough time and thus could scale back on buying new planes as you mentioned. In addition to that, the US govt could scale back on defense if we get a new president in 2009..
But on the other hand other countries like China could experience a surge in demand for air travel. In addition to that I have heard that transoceanic flights are where companies really make their money.. So with the weak dollar, maybe we’ll get more transoceanic flights because tourism will be booming?
Just curious, what is your buy order price for COL?
The position filled at $48.08
DGI:
There’s always another side to the coin. Most of the airlines that are struggling are domestic airlines. The chinese,Dubai, etc.. continue to see passenger growth despite the rise in high oil prices. This is mainly due to the expansion of their middle class. Now, true some airlines may cancel their orders. But also true, is many airlines are replacing their old fleet with new lighter more efficient airplanes.
IMHO:
The fact that US Airlines are hurting is EXACTLY why they must buy new, fuel efficient aircraft. They cannot afford to maintain their existing gas guzzlers. The 787 and C-Series for instance, offer 20% lower operating costs. The cost of buying a new aircraft is NOTHING when compared to the operating cost efficiencies.
With respect to defense, the incoming administration has been quiet about their priorities, but we ARE fighting 2 wars and facing increased threats worldwide (China, Russia, Iran to name a few). A breakout in peace is unlikely. There is still alot of uncertainty about what the administration will do for Space. I personally don’t see how they can fund investment there, but the other factors bode well for Rockwell Collins.
AviationWeek’s recent analysis tagged Rockwell Collins as the best run Aerospace company of its size.
Strong bench, win every contract they bid on (except one…. ONE) high employee retention, great financials.