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We reaffirmed our long-term Neutral recommendation on Rockwell Collins, Inc. (COL - Analyst Report) on Apr 11, 2013. We remain upbeat on the company’s balanced exposure to both types of customers, namely, commercial and military, as well as its strong balance sheet. However, risks associated with the reliance on international sales, high exposure to fixed price contracts and high research & development (R&D) overhead keep us on the sidelines.

Why Reiteration?

Headquartered in Cedar Rapids, Iowa, Rockwell Collins is the leading global supplier of communications and avionics equipment for both commercial and military customers. This helps the company to utilize government funds for the development of products for the dual-end market.

The dual-end market leads to higher volume sales, which create economies of scale in cost-sensitive government contracts. In the near term, the Surface solutions portfolio will shore up demand from military customers, while recovery in the business and regional jet market will boost commercial sales.

Again, it strong balance sheet and ongoing share repurchase program add visibility to the story. Rockwell Collins has a strong balance sheet among its peers with a low long-term debt-to-capitalization of 37.1% as of Dec 31, 2012 (Zacks industry average was 43.9%). The company continues to be a strong cash generator with $63 million of positive cash flow in the first quarter that came in ahead of the company’s expectations.

Meanwhile, Rockwell Collins generated 93% of revenues in fiscal 2012 from fixed priced contracts, exposing the bottom line to cost over-runs. As a result, the company will be able to make a profit only if costs stay under the contracted price.

Moreover, a large percentage of Rockwell Collins’ business is generated outside the U.S. (33% of sales in fiscal 2012). As most of the company’s products are of dual-use (military and commercial), acceptance of contracts are governed by laws, regulations and policies of the U.S. government.

Rockwell Collins operates in an industry requiring substantial investment in R&D expenditure. In fiscal first quarter 2013, R&D expenditure was $227 million (21.4% of sales).

The Zacks Consensus Estimate for the fiscal second quarter of 2013 is $1.16 per share, representing a year-over-year increase of 6.8%. For fiscal 2013 and 2014, the Zacks Consensus Estimates are $4.58 and $4.90 per share, up an estimated 3.9% and 6.9%, respectively.

Other Stocks to Consider

Rockwell Collins expects to report its fiscal second quarter 2013 on Apr 19, 2013. The company currently retains a Zacks Rank #3 (hold). Other stocks worth considering are Zacks Ranked #2 (Buy) Wesco Aircraft Holdings, Inc. (WAIR - Snapshot Report), FLIR Systems, Inc. (FLIR - Analyst Report) and Triumph Group, Inc. (TGI - Analyst Report).

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