Astronics Corporation: Ready for takeoff
Shooting for the stratosphere is routine for the aircraft that use the electronics equipment made by Astronics Corporation (Nasdaq: ATRO). Small-cap investors who decided to bet on the East Aurora, N.Y.-based company about this time last year have seen their money similarly soar, with the stock recently tripling in value.
Year to date, Astronics shares are up roughly 160%, and better than 60% in the just past six months. By comparison, the Dow Jones Aerospace Index is up 21% for the year and a measly 5% in the past six months.
For those arriving late to the Astronics party, a sudden sell-off after Federal Reserve policymakers tossed some cold water on Wall Street’s interest-rate expectations on Dec. 11 could provide an opportunity to buy into the company, since its shares have dropped more than 15% below the recent highs.
Still, analysts who track this trusted maker of electronic and lighting components in an industry where failure is not an option have taken a neutral stance, with three rating it at “hold.”
In 2007, the share price of Astronics has seemingly climbed faster than the military, commercial and business-jet aircraft that utilize the high-performance components that it makes at four North American plants. Astronics hit 52-week highs in late November and early December, most recently topping at $54.20 on Dec. 3. Since then, it’s been sliding lower — and without any news out, perhaps it’s just suffering along with the overall market that remains in a funk. The pullback has meant Astronics is trading back below $45. The stock closed at $41.20 on Tuesday.
Founded in 1968, Astronics is a respected aviation industry supplier, with its shares being publicly traded since 1984. Through its early years, Astronics was mostly a sub-$10 stock, before gaining some traction in the early part of this decade, then coming down in the post-9/11 angst that decimated the airline industry.
Among the Astronics products are the power systems needed to provide airline passengers with the juice they crave to fire up their media players or laptops. Astronics also makes the reading lights and passenger signage systems, plus the emergency lighting that plane manufacturers hope never have to be used.
More than half of the Astronics revenue profile is related to aircraft cabin electronics. About a quarter of its sales come from cockpit lighting systems. Roughly two-thirds of its business is related to commercial aviation.
The company has a long relationship with South America’s Embraer-Empresa Brasileir de Aero (NYSE: ERJ), a leading provider of the regional jets that many airlines now favor in order to serve smaller and mid-size markets. Astronics’ systems also are being used in such next-generation aircraft as the Airbus A380 superjumbo jet of EADS (Paris: EAD.PA), the military’s V-22 Osprey and F-35 Joint Strike Fighter, and such business-class very light jets as the Cessna Mustang of Textron Inc. (NYSE: TXT), the Embraer Phenom and the Eclipse 500.
Astronics has left a sub-$17 start for its stock in 2007 far behind, after briefly touching those lows again in April. It’s released a steady stream of new or continuing contracts, strong quarterly results, a healthy balance sheet and a generous backlog of business heading into 2008.
With longtime president and CEO Peter J. Gundermann in charge, Astronics has switched its strategy, building more higher-priced systems instead of the individual components that go into the jets.
The roster of institutional investors paying attention to Astronics has risen in the past year, with close to half of the 6.7 million common shares in their hands.
For the quarter ended Sept. 29, Astronics reported earnings of $4.1 million, or $0.48 per share, up from the $1.6 million, or $0.20 per share, posted in the 2006 period. Sales increased 36% to $37.7 million, as the company’s gross margin increased nearly 5 percentage points to 26.9%. Backlog was reported at $90 million.
Astronics executives sound optimistic as the company finishes 2007 in good shape. But as they gaze into the crystal ball toward 2008, the view is murky, with growth expected to tail off from this year.
“We now expect sales for the full year to be in the range of $155 million to $160 million, up approximately 40% over our 2006 total of $110.8 million,” Gundermann said in the company’s third-quarter earnings release. “This will be our third year in a row of strong growth at or above this level. Our early expectations are that 2008 will be another very good year for Astronics, but that our growth rate will likely moderate to a range of 10% to 20%.”
Rodman & Renshaw initiated coverage of Astronics on Nov. 26 at “market perform,” without a price target. Analyst Joe Giamichael wrote in a note to investors that Astronics “provides a compelling long-term investment opportunity” for reasons including its focus on niche markets, revenue visibility from its order backlog, and its moves to supply complete systems instead of just the components to manufacturers.
A day later Boenning & Scattergood cut its rating to “market perform” from “market outperform,” when Astronics shares reached its price target. Analyst Michael Ciarmoli, who began covering Astronics in midyear, wrote that the move was “based strictly on valuations.” He told clients, “While the company’s fundamentals and growth prospects continue to improve, we believe it is wise to wait for further signs of top-line growth before advocating the purchase of ATRO shares.”
Just after the third-quarter results came out in early November, analyst Richard Ryan of Feltl & Co. downgraded Astronics to “hold” from the “buy” rating in place since May.
Looking forward, analysts surveyed by Thomson Financial have expectations similar to the company. The consensus estimate calls for Astronics to report full-year revenue of $157 million, which would be 42% better than last year, with a 172% earnings per share of $1.88. In the current quarter, the analysts are looking for earnings per share of $0.31, up from $0.10 in the final quarter of 2006, on 21% revenue growth to $35 million.
Maybe it is time for Astronics shares to take a little breather. There doesn’t appear to be a Santa Claus rally in the works for stocks, especially after the Fed put a lump of coal in Wall Street’s stocking with a less-than-expected rate cut. Still, Astronics (ATRO) is making the transition to offering up higher-priced systems and not just the aviation components — which could lead to additional stock gains for investors who are prepared for takeoff.
