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Rockwell Collins Stays Neutral

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We have maintained our Neutral recommendation on Rockwell Collins Inc. (COL - Free Report) on May 3, 2013 based on its second quarter 2013 results and effective cash deployment strategy. The positives are partially offset by the effect of sequestration and the uncertainty related to the defense budget spending. The company currently has a Zacks Rank #3 (Hold).

Why the Reiteration?

Rockwell Collins is the foremost global supplier of communications and avionics equipment for both commercial and military customers. Its balanced exposure to both types of customers allows the company to use government funding to develop 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.

The company’s original equipment manufacturer market has revived with rising airplane deliveries at Airbus and The Boeing Company (BA - Free Report) . Therefore, the company is witnessing a rejuvenated business jet market with rising original equipment and improving aftermarket fortunes. Also, the company provides niche equipment, which has a captive market until the retirement of the specific model.

Recently, Rockwell Collins reported fiscal second quarter 2013 results with earnings beating the Zacks Consensus Estimate on the back of the company's share repurchase program. Earnings were also up 7% on a year-over-year basis.

Furthermore, a strong balance sheet, incremental dividend and an ongoing share repurchase program add visibility to the story. Management has rewarded shareholders by returning a substantial portion of its free cash flow through share repurchases and incremental dividends over the years. During the second quarter of 2013, the company repurchased 1.4 million shares of common stock at a total cost of $84 million. Recently, the company’s Board of Directors had approved the repurchase of its common stock worth $500 million.

However, these positives are offset by the U.S. government’s delayed funding authorizations, program execution risk, dependence on international sales, high exposure to fixed price contracts and high research & development overhead.

Other Stocks to Consider

Stocks worth considering in the space are Esterline Technologies Corp. (ESL - Free Report) and Hexcel Corp. (HXL - Free Report) , both with a Zacks Rank #2 (Buy).

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