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Rockwell Collins Tilting Toward Commercial Market

By    |   Thursday, 05 April 2012 09:21 AM

Rockwell Collins (COL) makes communications and aviation electronics for both commercial and military customers around the world, as well as ground and naval systems. As the U.S. defense budget shrinks, however, Rockwell management is tilting toward commercial customers for business.

Business revenue comes from the design and sale of communications, navigation, automated flight control, displays/surveillance, simulation and training, integrated electronics and information management systems, as well as service and maintenance.

U.S. government contracts represented 43 percent of sales in fiscal 2011. Exports were 30 percent. The backlog of funded government orders for year totaled $2.9 billion, down from $3.1 billion. The commercial order backlog, however, rose in 2011, to $1.4 billion from $1.1 billion.

U.S. government contracts are slowing, says the Cedar Rapids, Iowa firm. “Defense funding by the U.S. government faces significant pressures and is expected to decline over the next few years due to the overall economic environment, budget deficits and competing budget priorities,” management warns.

The industry is shrinking, too, Rockwell management says, a trend it is working to counteract.

“Consolidation has had a major impact on the competitive environment in which we operate. Over the past several years, our competitors have undertaken a number of mergers, alliances and realignments that have contributed to a very dynamic competitive landscape,” management says.

“During the past three years, we have completed five acquisitions and entered into several strategic alliances to improve our competitive position and expand our market reach.” In addition, a shift to satellite-based commercial aircraft systems represents a major shift in the market, one it is working to address.

Rockwell Collins is a $8.46 billion market cap company and it offers a 12-month trailing P/E of 14.79 compared to 16.39 for its sector, aerospace and defense. Its price-to-earnings growth (PEG) ratio is 1.56 vs. 0.63 for the sector.

Projected earnings per share growth over the next year is 12.28 percent compared to 16.76 percent for aerospace and defense stocks in general.

Divided analysts

Analysts are divided on Rockwell Collins, with the consensus to the lower side of neutral. RBC Capital Markets rates its stock outperform, as does Columbine Capital Services. Thomson Reuters/Verus calls it a sell.

“Columbine Capital projects that Rockwell will outperform the market over the next 12 months and recommends that investors buy it and hold until we recommend a sell,” its analysts said on March 31.

Rockwell Collins next reports on April 19.

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