Description

Curtis Wright (CW) is a $5.6B market capitalization, $6.6B enterprise value provider of highly engineered and mission critical technologies to the aerospace and defense (A&D), commercial power and industrial/process markets.  The company is headquartered in Davidson, N.C. and was originally formed in 1929 by the merger of Curtiss Aeroplane and Motor Company, founded by Glenn Curtiss (considered the father of naval aviation), and Wright Aeronautical Corporation, founded by Orville and Wilbur Wright.

The investment thesis on CW is based on the following points:

1. Curtiss Wright is an attractive absolute value at 16x earnings and a 7% free cash flow.  While these are not uniquely depressed or “cheap multiples” I feel comfortable that they are “reasonably” normalized earnings relative to many publicly traded securities where trailing margins and earnings are inflated and are likely in the process of normalizing. 

2. CW has multiple niche businesses that are truly “highly-engineered,” and have unique strategic value.  In a time when the risk of technological obsolescence is elevated, CW possesses a portfolio of critical technologies that are unlikely to be displaced.  Specific examples include sensors and actuators used on commercial aircraft, instrumentation and control systems used on military aircraft, secondary propulsion systems used in nuclear submarines and reactor coolant pumps used in nuclear reactors. CW manufactures “mission-critical” products.  The quality of the products manifests itself in consistent mid-teens operating margins as well consistent free cash flow generation which has been in excess of 100% of net income for each of the last ten years.

3. Multiple end markets for CW have a positive multi-year outlook and improving fundamentals.  56% of revenues are generated from Defense markets with a core competency serving the Navy.  Specific programs they will benefit from are the Columbia and Virginia Class submarines and the Ford class aircraft carrier.  The company is a leading provider of key defense electronics technologies and will benefit from higher defense spending in a rising threat environment.  CW is a supplier of nuclear reactor technologies that will see increased demand over time as nuclear is recognized as a cost-effective, reliable and clean source of energy going forward.  

Operations

CW provides highly engineered products, solutions and services to the aerospace and defense industries as well as commercial power, process and industrial markets.  The company manages the business through three individual segments:  Aerospace & Industrial (31% of 2021 sales, 30% of EBITDA), Defense Electronics (29%, 37%) and Naval & Power (40%, 33%). 

Aerospace & Industrial - Segment revenues are primarily driven by commercial aerospace and defense customers.  Products includes specialty and industrial vehicle products such as electronic throttle control devices and transmission shifters, sensors, controls and electro-mechanical actuation components used on commercial and military aircraft, and surface technology services including shot and laser peening and engineered coatings.

Defense Electronics - Segment sales are primarily driven by the Defense industry with some commercial exposure.  Primary products include Commercial Off-the-Shelf (COTS) embedded computing board-level modules, data acquisition and flight test instrumentation equipment, integrated subsystems, instrumentation and control systems, tactical communication solutions for battlefield network management, and electronic stabilization products.  CW has platform level content on helicopters, fighter jets, unmanned aerial vehicles, ground vehicles, and nuclear and non-nuclear surface ships and submarines.  Commercial solutions includes avionics and electronics, flight test equipment and aircraft data management solutions.   

Naval & Power - Segment sales are driven by the naval defense and process markets.  For naval defense they provide naval propulsion and auxiliary equipment such as main coolant pumps, power-dense compact motors, generators, steam turbines, valves and secondary propulsion systems.  CW provides ship repair and maintenance for the U.S. Navy’s Atlantic and Pacific fleets through three service centers.  CW provides numerous process and power products for commercial nuclear power plants and nuclear equipment manufacturers.  Products include hardware, pumps, valves, fastening systems, specialized containment doors, airlock hatches and spent fuel management products.  The company also provides Reactor Coolant Pumps (RCPs) and control rod drive mechanisms for commercial nuclear power plants, specifically supporting the Generation III+ Westinghouse AP1000 reactor design.  Other commercial exposures include providing severe-service valve technologies and services, heat exchanger repair, and piping test and isolation products to oil and gas, chemical, petrochemical and industrial markets.

When thinking about the end-market exposures of the company, I believe the graphic below is helpful.  Effectively 66% of sales are A&D with 55% defense and 11% commercial aerospace.  34% of sales are to commercial markets with 18% power and process (over half nuclear) and 16% general industrial sales.

Facilities - CW had 154 facilities worldwide with 28 owned facilities and 122 leased facilities.  Management notes that 80% of facilities operate as manufacturing and engineering, metal treatment, or aerospace overhaul and 20% operate as selling and administrative. 

Financial Outlook

I am forecasting sales of $3.6B, $2.8B and $2.9B from fiscal 2022-2024, EPS of $8.96, $9.62, and $9.85, EBITDA of $541MM, $600MM, and $620MM and FCF of $385MM, $402MM and $415MM.  Curtis Wright consistently generates FCF and has historically made many tuck-in acquisitions.  From 2016 to estimated year-end 2022 the company estimates $3.3B in cash generation with 22% spent on operational investments, 41% spent on acquisitions and 37% returned to shareholders - primarily through share repurchases.  Of note, the company repurchased $350MM in stock in 2021.  The balance sheet is healthy with $1B in net debt or approximately two turns.

Management

Lynn Bamford was named CEO of CW in 2021.  Before that role she managed the Defense and Power Segments.  Additionally, Bamford was a Senior Vice President and General Manager of Defense Solutions from 2013 through 2019.  She joined the company through CW’s acquisition of Dy4 in 2004.  Chris Farkas was promoted to CFO in 2020 after serving as VP and Controllers since 2014.  He has been at CW since 2009 and before joining the company had served in finance roles for 17 years at United Technologies and Parker Hannifin. I believe this is a competent team and in particular Bamford has a solid track record in M&A.  With regards to financial targets, CW introduced a “Pivot to Growth” strategy in May of 2021 at their investor day for 2021-2023 and results are on-track thus far.  Targets include revenue growth of 5-10% (3-5% organic), positive operating leverage, top quartile margin performance, > 10% EPS growth and > 100% free cash flow conversion.

Risks Factors

Recession- both commercial aerospace and general industrial markets could see weakness due to a recession

Supply chain - while recent earnings have been solid, component issues for Defense Electronics have been an issue

Platform issues - Production issues on key product platforms could lead to earnings weakness - Virginia and Columbia class submarines, Ford class aircraft carriers and the F-35 are all key platforms

Catalyst

Continued strong execution and realization of three year targets

Growth in defense spending

Growth in nuclear power