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I was looking through the list of top % gainers on the NYSE yesterday and this morning and came across Esterline Technologies (ESL), which closed yesterday at $47.73, up $2.23 or 4.90% on the day. I do not own any shares or options on this company. However, after reviewing the data available, I believe this stock deserves a place on this blog and
ESTERLINE (ESL) IS RATED A BUY
Let me explain why I have decided to add this company to my list of 'investable' companies!
What exactly does this company do?
According to the Yahoo "Profile" on Esterline, the company
"...engages in the design, manufacture, sale, and marketing of engineered products and systems to the aerospace and defense industry in the United States and internationally. It offers avionics and controls systems, including technology interface systems for various applications in military, commercial aircraft, and land and sea-based military vehicles; secure communications systems; specialized medical equipment; and other industrial applications."
How did the company do in the latest quarter?
On May 31, 2007, Esterline reported 2nd quarter 2007 results. For the quarter ended April 27, 2007, sales were $312.3 million, up from last year's $247.9 million. Net earnings came in this year at $19.8 million or $.76/diluted share, up from last year's $17.7 million or $.68/diluted share in the same period.
These results beat expectations of $289.4 million in revenue and earnings of $.65/share. The company also raised guidance, increasing the lower range of earnings to a 2007 profit of $2.50 to $2.60/share, up from prior guidance of $2.45 to $2.60/share.
What about longer-term financial results?
Reviewing the "5-Yr Restated" financials on Esterline from Morningstar.com, we can see that revenue has been steadily rising with $.4 billion in revenue in 2002 increasing to $972 million in 2006 and $1.02 billion in the trailing twelve months (TTM). During this same period, except for a dip in earnings from $1.35/share in 2002 to $1.33/share in 2003, the company has been increasing earnings to $2.15/share in 2006 and $2.32/share in the trailing twelve months. No dividend is paid. Shares have been increasing very slowly with 21 million shares in 2003, increasing by about 25% to 26 million in the TTM. During this same period, revenue has grown about 100% and earnings have also almost doubled. This is an acceptable dilution from my perspective.
Free cash flow has been a bit erratic recently but positive with $41 million in 2004, $53 million in 2005, $10 million in 2006 and $20 million in the TTM.
The balance sheet looks solid with $48.3 million in cash as well as $419.5 million in other current assets. This total of $467.8 million in current assets, when compared to the $178.4 million in current liabilities yields a healthy current ratio of 2.62.
What about some valuation numbers on this stock?
Reviewing Yahoo "Key Statistics" on Esterline, we can see that this is a mid cap stock with a market capitalization of $1.22 billion. The trailing p/e is a very reasonable (imho) 20.56 with a forward p/e of 15.65 (fye 27-Oct-08 estimated). The PEG (5 yr expected) works out to a very nice 1.02.
According to the Fidelity.com eresearch website, the company has a Price/Sales (TTM) ratio of 1.12, under the industry average of 1.46. In terms of profitability, the company is reported to be less profitable than the industry average at 8.53% ROE (TTM), compared to the average of 22.12%.
Yahoo reports 25.58 million shares outstanding for Esterline, with 25.50 million that float. As of 5/10/07, there were 1.86 million shares out short representing 10.9 trading days of volume or 10.3% of the float. Using my own arbitrary '3 day rule' for significance in this ratio, this suggests that there is a great deal of pent-up buying demand waiting to be activated, that is, there are a lot of short-sellers who have already sold shares in ESL betting the stock will decline. These sellers may well be squeezed as the latest good earnings report will certainly pressure them to buy back these shares. Of course that is only my own 'best guess' on these shares, many of which could possibly already be re-purchased.
As I noted, no dividend is paid and the last stock split was a 2:1 split back in April, 1998.
What does the chart look like?
If we review a "Point & Figure" chart on Esterline (ESL) from StockCharts.com, we can see that the stock which showed some weakness back in March, 2003, had a strong run from $15/share at that time to a peak in June, 2006, when the stock hit $46. More recently the stock has pulled back to a low of $30 in August, 2006, only to climb once again, breaking through resistance in Novembe,r 2006 at $41, and now climbing to new heights at $47.73. The stock chart looks encouraging to me.
Summary: What do I think?
Let's review a few of the things I have discussed above. First of all they came in with what I would call a solid earnings report, beating expectations on both revenue and earnings and also raised guidance. Their Morningstar report looks quite good with steady revenue and earnings growth the past several years with relatively stable outstanding shares. Free cash flow is a bit erratic but always positive and the balance sheet is solid.
Valuation-wise the p/e is reasonable, the PEG is just over 1.0, and the Price/Sales is good relative to its peers. However, profitability, in terms of ROE is not quite as impressive as other companies in its industry per Fidelity. To top it off, we may well have a bit of a short squeeze on our hands with over 10 days of short interest outstanding and the company reporting a solid earnings report. Finally, the chart looks positive to me!
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