Rockwell Reaffirms 2011 Outlook

Rockwell Collins Inc. (COL - Analyst Report), the supplier of avionics and military equipment, reaffirmed its fiscal 2011 guidance and raised the share repurchase authorization. The company expects revenue in the range of $4.80 billion – $4.85 billion, cash flow from operations of about $650 million and earnings per share from continuing operations between $4.00 –  $4.10. The EPS guidance however excludes the potential gain on sale of Rollmet product line.

Earlier, in June 2011, Rockwell Collins announced its decision to sell its Rollmet product line to Precision Castparts Corporation (PCP - Analyst Report). The company’s decision to divest the Rollmet business stems from its inclination to have a better focus on its core markets, leading to stronger growth.

The Rollmet business provides seamless alloy and stainless steel pipes and propulsion system components for the energy, petrochemical and defense industries. Rockwell is of the opinion that the sale would also enhance Rollmet’s position as it will now be better aligned with its end-markets. The company expects the sale to close in the fourth quarter of fiscal 2011.

Looking forward, for fiscal year 2012, Rockwell anticipates revenues between $4.9 billion and $5.0 billion, EPS in the range of $4.40 to $4.60, and cash flow from operations of $625 million to $725 million. To fuel the growth in EPS the company increased the share repurchase authorization by $700 million, which will be funded through cash flow from operations and new debt of approximately $250 million.

Earlier, Rockwell Collins ended the third quarter of fiscal year 2011 ending on June 30, 2011 with cash and cash equivalents of $268 million. In the said quarter Rockwell Collins repurchased 1.1 million shares of its common stock at a total cost of $66 million and disbursed $38 million in dividends. As of June 30, 2011 the company had $51 million of authorized share repurchase pending.

Rockwell Collins is a leading global provider of communication and aviation electronic solutions for commercial and government customers. Its aircraft electronics are installed in business as well as commercial aircraft cockpits and cabins of nearly every airline in the world. Additionally, its airborne and ground-based communication systems transmit approximately 70% of all U.S. and allied military airborne communications.

The company is witnessing a rejuvenated business jet market with rising original equipment and improving aftermarket fortunes. Furthermore, a strong balance sheet, incremental dividend, and the ongoing share repurchase program add visibility to the story.

However, the positives are offset by the U.S. government’s delayed funding authorizations, program execution risk, dependence on international sales, high exposure to fixed priced contracts and high research and development overhead. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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