Why Is Woodward (WWD) Down 8.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Woodward (WWD). Shares have lost about 8.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Woodward due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Woodward Q1 Earnings Beat Estimates, Revenues Up Y/Y

Woodward reported strong first-quarter fiscal 2020 results, wherein earnings and revenues jumped year over year. The company’s performance was primarily driven by healthy market fundamentals in the Aerospace segment and strong product portfolios.

Net Earnings

On a GAAP basis, net earnings in the fiscal first quarter were $53.4 million or 83 cents per share compared with $49.1 million or 77 cents per share in the year-ago quarter. The year-over-year increase was mainly driven by top-line growth and reduced income tax expenses.

Adjusted net earnings in the fiscal first quarter were $71.2 million or $1.10 per share compared with $61.6 million or 96 cents per share in the year-ago quarter. The bottom line surpassed the Zacks Consensus Estimate by 7 cents.

Revenues

In the December quarter, net sales increased 10.3% year over year to $720.4 million, which reflect healthy market momentum in Aerospace segment, partly offset by headwinds from the halted production schedule of The Boeing Company’s (NYSE:BA) 737 MAX aircraft. The top line outperformed the consensus estimate of $667 million.

Segment Results

Aerospace: Net sales were up 20.6% year over year to $473.9 million, benefiting from broad-based sales growth across commercial OEM and defense aftermarket. Despite 737 MAX grounding, the segment continues to benefit from strong flight utilization trends, sustained global passenger growth, higher defense spending coupled with increased demand for aircraft content as narrowbody production ramps. The segment’s earnings were $92.9 million, up 27.5% from $72.9 million in the year-ago quarter, primarily due to higher sales volume.

Industrial: Net sales totaled $246.4 million, down 5.2% as softness in oil and gas resulted in reduced inventory management and aftermarket activity. However, it was partially offset by higher sales in renewable business. The segment’s earnings were $28.2 million, down 3.2% from $29.2 million in the year-ago quarter mainly due to lower sales volume.

Notably, from the perspective of resource allocation and capital investment, renewables portfolio was not a primary focus area for Woodward in this quarter. Instead, the company is streamlining its power generation business with the proposed sale of renewable power systems to Aurelia Group for $23.4 million. The transaction, announced in February 2020, is anticipated to close in the third quarter of the current fiscal.

Cash Flow & Liquidity

In the first three months of fiscal 2020, Woodward generated $27.4 million of net cash from operating activities compared with $84.7 million in the year-ago quarter. In the same period, free cash flow was $10.2 million, down from $53.4 million, primarily attributable to higher working capital. As of Dec 31, 2019, the company had $148 million in cash and equivalents with $729.2 million of long-term debt (less current portion).

Significant Development

Subsequent to the quarter end, Woodward inked an all-stock 6.4 billion merger deal with Hexcel Corporation. Per the deal, Hexcel shareholders will own 45% of the combined entity, and that of Woodward will have an ownership stake of 55%. Projected to generate nearly $1 billion of free cash flow in fiscal 2020, the tax-exempted merger is expected to upgrade the overall financial health of both companies with a perfect combination of growth trajectories, complementary cultures and scalability in operational activities. The transaction is expected to close in the third quarter of 2020.

Updated Fiscal 2020 Guidance

Woodward has updated outlook for fiscal 2020 to better reflect the expected bearings of lower tax rate, renewables portfolio divestiture, halted production of 737 MAX, higher outstanding shares and weak sales performance of oil and gas sectors. The company expects total net sales to be in the range of $2.9-$3 billion compared with the previous guidance of $3-$3.1 billion. Aerospace sales are projected to be up low single digits compared with earlier guidance of 6% rise. In line with the previous guidance, Industrial sales are anticipated to be flat year over year.

Adjusted earnings per share are anticipated to be between $5.22 and $5.52, based on around 65 million outstanding shares compared with the prior guidance of $5.30-$5.60, based on 64 million outstanding shares. Adjusted free cash flow is expected to be approximately $420 million. The effective tax rate is likely to be 20% compared with the preceding guidance of 22%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

Currently, Woodward has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Woodward has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.