Pat McKeough responds to many requests from members of his Inner Circle for specific stock tips as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “U.S. Stock Picks” on Thursday.
This week an Inner Circle Member asked us about a Canadian company that’s an international leader in the aircraft parts industry. Héroux-Devtek is the world’s third-largest maker of landing gear for aircraft, with clients such as Boeing, Embraer and Bombardier. Pat considers the company’s rising earnings in light of a recent acquisition and a new contract with Boeing. He also looks at the impact of shrinking military budgets around the globe on Héroux-Devtek’s prospects.
Q: Pat: What is your opinion on Héroux-Devtek Inc.? Best regards.
A: Héroux-Devtek Inc. (symbol HRX on Toronto; www.herouxdevtek.com) is the world’s third-largest maker of landing gear for aircraft, particularly helicopters and small jets. It also makes metal enclosures for airborne radar and other electronic equipment.
Customers include Boeing, Sikorsky, Bombardier and Embraer, as well as various militaries. About 75% of Héroux-Devtek’s sales come from outside of Canada.
In February 2014, the company paid $138.8 million for U.K.-based landing gear maker APPH Ltd., which has four plants in the U.K. and one in Wichita, Kansas.
Thanks to this acquisition, Héroux-Devtek earned $3.8 million, or $0.11 a share, in its 2015 second quarter, which ended September 30, 2014. That’s up 37.4% from $2.8 million, or $0.09 a share, a year earlier. Sales jumped 49.1%, to $84.1 million from $56.4 million. Without APPH, sales rose 4.8%.
As of September 30, 2014, the company’s total debt was $98.6 million, or 24% of its market cap. It also held cash of $50.9 million, or $1.42 a share.
Héroux-Devtek ended the quarter with an order backlog of $450 million, up 29.7% from $347 million a year earlier.
Company has new contract to supply parts for Boeing 787 Dreamliner
In August 2014, Héroux-Devtek won a new multi-year contract from Boeing to supply certain parts for its new 787 Dreamliner passenger plane. The company did not say how much this deal is worth, but it will spend $90 million to upgrade its facilities to handle this order. It expects to begin shipping these parts in early 2015.
Héroux-Devtek will probably earn $0.55 a share in 2015, and the stock trades at 20.7 times that estimate. That’s a high price-to-earnings ratio for a company closely tied to the cyclical commercial aircraft industry. As well, many governments are cutting their defence spending in response to rising budget deficits. Military clients supply about half of Héroux-Devtek’s revenue.
Still, the company’s reputation for quality and its long-term contracts with major customers give it appeal. It could also become a takeover target for a larger aerospace firm. That’s not reason enough on its own to buy the stock, but it adds appeal.
We view Héroux-Devtek as a hold.
Monday we examine why Adidas has fallen behind in the very competitive sportswear race.
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