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Bear of the Day: Esterline Technologies Corporation (ESL)

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Esterline Technologies Corporation (ESL - Free Report) , a Zacks Rank #5 (Strong Sell) designs, manufactures, and markets engineered products and systems primarily for aerospace and defense customers in the United States and internationally. The Company designs, manufactures and markets engineered products and systems for application within the industries it serves. The Company operates through three segments: Avionics & Controls, Sensors & Systems, and Advanced Materials.  

Recent Earnings Data

ESL reported Q4 17 earnings on November 10th, where they significantly missed both the Zacks consensus earnings and revenue estimates for the second consecutive quarter.  Specifically, revenues were down -2.3% YoY, and EPS was down -35.2% YoY.  The declines in both the top and bottom lines were attributed to the Advanced Materials segment, and the planned improvement of operational efficiencies at Kirkhill (plant that produces highly engineered, organic, and in-organic elastomer based products) stalling in Q4 17.  

FY 2018 Expectations Reduced

Due to the issues facing the company, and the poor earnings report, management cut Fiscal Year 2018 estimates in several key areas; revenues are now expected to be in the range of $2.025-2.075 billion vs. the expected $2.06 billion, GAAP EPS has been cut to a range of $3.65-4.05 vs. the expected $4.98, Free Cash Flows (FCF) have been cut to a range of $105-130 million vs. the expected $191 million.  Lastly, management commented that these numbers are assuming that the Advanced Materials segment is unchanged which given the past quarters performance is not guaranteed.  

Management’s Take

According to Curtis Reusser, CEO, “We were disappointed with our fourth quarter results, as performance in our Advanced Materials segment was well below our expectations and has impacted our 2018 outlook. Underperformance was concentrated in our Kirkhill operations, where, despite continued focus and effort across the business, progress toward achieving operating efficiencies stalled in the fourth quarter. We are intensifying our remediation efforts, taking immediate and wide-ranging actions to improve operational performance while simultaneously evaluating all strategic options for this business.”

Price and Earnings Consensus Graph

As you can see in the graph below, both the stock price and future consensus earnings estimates declined after the quarterly miss and reduction in guidance.

Esterline Technologies Corporation Price and Consensus

Esterline Technologies Corporation Price and Consensus | Esterline Technologies Corporation Quote

Declining Earnings Estimates

The issues facing the Advanced Materials segment, and lowered 2018 guidance caused analysts to decrease earnings estimates over the past 30 days for Q1 18, Q2 18, FY 18 and FY 19; Q1 18 fell from $0.79 to $0.52, Q2 18 dropped from $1.18 to $0.92, FY 18 was cut from $5.02 to $3.85, and FY 19 declined from $5.84 to $4.75

Alternative Investment Ideas

With ESL carrying a Zacks Rank #5 (Strong Sell), there are three companies within the Aerospace-Defense Equipment sector that currently carry a Zacks Rank #1 (Strong Buy).  So if you are inclined to invest in this sector you would be best served by looking into Curtiss-Wright Corp (CW - Free Report) , Elbit Systems , and or Teledyne Technologies (TDY - Free Report) .

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