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It is since the fall of 2022 that I concluded that Curtiss Wright (New York stock market :CW) I was optimistic about the business and its prospects, but I was not prepared to pay a premium for the shares.
Fast forward nearly two years and shares are up another 50%, with most of the share price returns coming from inflation in valuation multiples, supported by continued strong operating performance from the company.
I welcome this operational momentum and performance, but the ever-increasing valuation multiples make me cautious about reviewing the shares at current levels.
A diversified industrial company
Curtiss-Wright is a diversified industrial company with operations in defense, commercial aerospace, industrial, and power generation. That said, it is actually a mix of defense and industrial businesses, with defense-related businesses accounting for about half of sales.
Founded in 1929, the company has generated sales of $3 billion over the next century, with customers in more than 100 countries and a workforce of more than 8,000, a significant proportion of whom are engineers. About three-quarters of sales are in North America, with the remainder in Europe and the Asian region. The company has a long tradition, having played a key role during World War II, and it has been named after some of the key industrialists of the early 20th century.
The company highlights qualities such as domain expertise, long-term customer relationships, an engaged culture, a global footprint and a focus on innovation as reasons why the company wins in the market.
A reasonable long-term performer
Over the past decade, Curtiss has grown its sales from $2.2 billion in 2014 to about $3 billion, which translates into single-digit sales growth. That understates the company’s accomplishments, as operating margins have expanded from 15% to 18%, and the company has also repurchased about one in five outstanding shares during that time. All of this supposed that profits rose from about $3 to $4 per share to nearly $10 per share over the same period.
In November 2022, the last time I looked at the stock, it was trading at $177, giving the company an equity valuation of $6.7 billion and an enterprise valuation of $7.9 billion. This valued the company at a multiple of 21 to 22 times earnings, a valuation that was likely to come down as the company saw its order book grow 19% to $2.6 billion at that time. With higher growth and reasonable leverage, I found the valuation to be more than full, despite potential drivers of the business, including defense exposure in an uncertain world.
Be doing well
In the two years since I last looked at the stock, Curtis shares have steadily increased, from $177 per share in November 2022 to $271 per share currently, after recently reaching $286 per share.
Earlier this year, Curtis reported an 11% increase in sales in 2023 to $2.85 billion, with adjusted earnings per share up 15% to $9.38 per share. Net debt decreased to a very manageable $643 million, with EBITDA reported at a similar figure.
For 2024, the company expects sales to increase 4% to 6% to $2.96 billion to $3.01 billion, with adjusted earnings expected to be up to $10.00 to $10.30 per share.
In April, the company completed a $34 million deal to acquire WSC, an add-on deal that is expected to add about $15 million to annual sales, adding about half a percent to total revenue growth.
In May, the company published Strong first quarter results, which led to a one-point increase in full-year sales guidance to 5-7%, driven by deal-making, with earnings per share up ten cents to $10.10-$10.40 per share. Net debt increased to $712 million amid modest M&A activity, still very reasonable.
Later in the month, the company allowed The group also announced a new $300 million share buyback program, while raising its dividend in an unconvincing manner. The quarterly payout was increased by 5% to just $0.21 per share on a quarterly basis. Later in the month, the company raised its long-term organic growth forecast to 5%, helped by the company’s strong positioning.
Another case
In early June, Curtiss-Wright announcement The acquisition of Ultra Energy for $200 million in cash. Ultra is a designer and manufacturer of reactor protection systems, neutron monitoring systems, temperature and pressure sensors, all for nuclear, industrial and aerospace applications.
These businesses generated annual revenue of $65 million, suggesting they are valued at three times revenue, and the acquisition should be positive for earnings per share. In total, the deal will add just over 2% to pro forma sales, which bodes well for the company’s expected results.
With 38 million Curtiss-Wright shares valued at $11 billion, the company is valued at about 3.7 times revenue. So the deal seems reasonable, at a slight discount to its own valuation. Pro forma net debt is expected to climb to over $900 million, which is still very modest here.
And now?
With shares up more than 50% in less than two years, while the company has seen modest revenue and earnings growth, valuation multiples have expanded significantly. While earnings could come in at around $10.50 per share, above official guidance for this year, the multiples are quite demanding. means that the stock trades at 25–26 times adjusted earnings.
The optimism is fueled by the fact that debt is relatively modest, at around 10% of generated EBITDA. Moreover, the company continues to perform well, with a book-to-bill ratio of 1.25 times in the first quarter, helped by orders in the defense and aerospace markets. The order book has now increased by 7% to $3.1 billion, which is broadly in line with current revenue figures, if not slightly above reported sales.
All of this gives me a good appreciation for the company, its balanced approach to capital allocation, and its continued track record of targeted M&A. The reality is that the stock has simply had too much momentum, pushing expectations way too high here. This makes me a bit cautious, even though the company is well diversified, well positioned, and has lived up to its positioning, because frankly, I have been a bit too cautious in 2022.
