Is It Too Late to Buy Woodward After a 50% Rally?

Key Concepts

• Woodward (WWD): An industrial component manufacturer specializing in specialty electronics for engine performance optimization, primarily in the aerospace sector.
• Moneyball database: A system used for rating companies.
• Aerospace Industry: A significant sector for Woodward, with major positions in aircraft like the A320, Boeing 737 Max, and 787.
• Hexcel Deal: A proposed merger with Hexcel in 2020 that was called off due to COVID-19.
• Chip Blankenship: Current CEO of Woodward, previously credited with turning around Howmet Aerospace.
• Howmet Aerospace: A company that Chip Blankenship successfully managed.
• Arconic: A former company where Chip Blankenship and a current board member previously held executive positions.
• Balance Sheet: Financial statement detailing assets, liabilities, and equity.
• Revenue and Earnings Per Share (EPS): Key financial metrics indicating company growth.
• Cyclical Business: A business whose performance is tied to economic cycles.
• Dividend: A distribution of profits to shareholders.
• Share Repurchase: A company buying back its own stock.
• Valuation: The process of determining the current worth of an asset or company.
• Meme Stocks: Stocks that gain popularity through social media and online communities, often detached from fundamental value.
• Supply Chain: The network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer.
• Transdigm and Howmet: Companies preferred by Lou Whiteman and Jason Hall, respectively, over Woodward.

Company Strength: 6/10

Woodward is an industrial component manufacturer primarily focused on specialty electronics that optimize engine performance. The company holds significant positions in the aerospace sector, supplying components for major aircraft models such as the A320, Boeing 737 Max, and 787. They also have a presence in non-aerospace industrial and maritime systems.

Key Points:

• Industry and Competition: Woodward operates in the aerospace and industrial sectors. While it's a good, sustainable business, the assessment suggests there are better investment opportunities within the aerospace world, particularly in terms of growth potential.
• Headwinds: The company has faced headwinds, which contributed to the score.
• Hexcel Merger: A proposed deal to combine with Hexcel in 2020 was canceled due to the COVID-19 pandemic, which the analysts believe would have created a stronger company.
• Analyst Perspective: Lou Whiteman expressed being of "two minds," acknowledging it as a good business but finding better growth prospects elsewhere. Jason Hall agreed, noting that while Woodward's profitability metrics are comparable to peers, the stock's valuation doesn't align with its profitability, suggesting "better fish to catch in the same pond."

Management: 8/10

The management of Woodward received a strong rating, largely due to the leadership of its current CEO, Chip Blankenship.

Key Points:

• CEO Chip Blankenship: Blankenship, who took over as CEO in May 2022, has a proven track record. He is credited with cleaning up the mismanagement at Howmet Aerospace (formerly part of Arconic) and creating the successful company it is today. His experience at GE and his ability to "pick up the pieces" after the failed Hexcel deal at Woodward are highlighted.
• Industry Expertise: Blankenship's deep knowledge of the industry and his demonstrated ability to manage complex situations are seen as significant assets.
• Board of Directors: The board is noted for its strong composition, featuring former and current executives from the aerospace industry. This includes a former CEO of Arconic, bringing valuable expertise and connections crucial for a company like Woodward.

Financials: 6/10 (Jason), 7/10 (Lou)

Woodward's financial health is considered solid, though not exceptional.

Key Points:

• Balance Sheet: The balance sheet is described as "fine," with debt approximately twice the amount of cash. However, the absolute amounts are not considered massive, indicating manageability.
• Revenue and EPS Growth: Both revenue and earnings per share (EPS) showed an 8% year-over-year increase in the most recent quarter. This growth was driven by 15% growth in aerospace, which offset declines in other segments.
• Cyclical Benefit: The company is benefiting from a strong and sustainable cycle in its cyclical businesses.
• Shareholder Returns: Woodward offers a "tiny dividend" and engages in share repurchase activity.
• Analyst Sentiment: While there are "no quarrels" and "no reasons to worry," the financials are described as "just fine" and "nothing to get excited about either," leading to a slightly lower score from Jason Hall.

Valuation: 6/10 (Jason), 7/10 (Lou)

The valuation of Woodward's stock is a point of contention, with analysts expressing more enthusiasm for the business itself than its current stock price.

Key Points:

• Future Stock Performance: Jason Hall expects 5-10% returns over the next five years, rating safety at a "little lower" than Lou.
• Market Sentiment: Jason Hall believes the aerospace industry and the "space craze" have led to investors "mimifying" stocks, including Woodward. This speculative trading, he argues, makes the math less favorable for both upside potential and downside risk at current valuations.
• Business vs. Stock: Jason Hall explicitly states, "I like the business better than the stock, period."
• Recent Performance: The stock has seen significant gains, reportedly up 50% year-to-date.
• Sustainability of Cycle: Lou Whiteman believes the current cycle is sustainable and doesn't foresee an immediate crash, even suggesting the stock could rise another 50%. He rates it a "strong seven" for market performance (5-10% returns), emphasizing Woodward's critical role in the aircraft supply chain.

Overall Score and Conclusion

Woodward received an overall score of 6.4/10.

Key Takeaways:

Woodward is a fundamentally sound industrial component manufacturer with a strong presence in the aerospace sector and capable management. The company is benefiting from a favorable industry cycle. However, concerns about its current stock valuation, driven partly by market exuberance and the "meme stock" phenomenon, temper the enthusiasm for its investment potential. While the business itself is well-regarded, investors are advised to consider whether the current stock price accurately reflects its long-term prospects, with some analysts suggesting better investment opportunities exist elsewhere in the aerospace industry. Lou Whiteman favors Transdigm, while Jason Hall prefers Howmet.