Woodward, Inc. WWD shares have gained 24.8% in the past year, underperforming the S&P 500 composite and the sub-industry’s growth of 25.6% and 34.7%, respectively.
Price Performance
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The stock closed the last trading session at $168.70, 16% below its 52-week high of $201.64, reached on Nov. 26, 2024.
Does this recent pullback from its 52-week high indicate a buying opportunity? Let’s evaluate Woodward's pros and cons to ascertain the best course of action for your portfolio.
Strength in Aerospace to Drive WWD’s Top Line
Headquartered in Fort Collins, CO, Woodward is an independent designer, manufacturer and service provider of energy control and optimization solutions for the aerospace and industrial markets.
Revenues from Woodward’s Aerospace business are expected to improve in the upcoming quarters, driven by strength in commercial markets as well as higher defense activity despite supply-chain challenges. In the fourth quarter of fiscal 2024, net sales for the segment were up 22% year over year while fiscal year revenues were up 15%. This upside can be attributed to strong demand, strong passenger traffic and higher aircraft utilization.
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Woodward expects to gain from high-growth programs like the LEAP and GTF engines, which are expected to drive service growth. Geopolitical developments have been driving demand for defense products, and the company expects strong growth across its defense portfolio in 2025, including a considerable increase in smart defense production. For fiscal 2025, Aerospace segment revenues are anticipated to increase in the range of 6-13%, whereas segment earnings (as a percentage of revenues) are expected to be 20-21%.
However, the persisting supply-chain challenges in the Aerospace segment are a concern.
WWD’s Industrial Unit Has Many Tailwinds
Woodward’s Industrial business segment has been gaining from solid demand for power generation and continued requirement for backup power for data centers. Higher power demand to support grid stability is another tailwind. Increasing demand for alternative fuels across the marine industry, as well as momentum in the global marine market brought on by higher utilization and rising shipbuilding rates, bodes well. Within oil and gas, an encouraging investment outlook in China, the Middle East and India’s refining and petrochemical activities are other growth drivers. Driven by strength in these markets, core Industrial segment sales are expected to grow 3% to 7%, despite challenges in the China on-highway market.
Investments in New Businesses Bode Well for WWD
Woodward has been investing significantly in technologies to secure fresh businesses. It is spending on new manufacturing units and automation equipment to boost efficiency as the company intends to accelerate production. In fiscal 2024, Woodward completed a $55 million, multi-year transformation of the Aerospace Maintenance, Repair and Overhaul (MRO) facility in Loves Park, IL, to meet Commercial aftermarket opportunities.
As part of this initiative, Woodward entered into a five-year MRO Services agreement with Lufthansa Technik pertaining to specific components it makes. This work will be carried out at Woodward's facilities in Rockford, IL, and Prestwick, the U.K. In July 2024, Woodward announced its selection by Boeing to design an innovative rotary actuator for the company’s Transonic Truss-braced Wing X-66A aircraft demonstrator to advance the aviation industry’s goal of achieving net-zero emissions by 2050.
It also divested its non-core heavy-duty gas turbine combustion parts business, based in Greenville, SC, to GE Vernova. It also expanded its Glatten facility to enhance capacity and streamline operations.
Woodward also recently announced an agreement to acquire Safran Electronics & Defense’s electromechanical actuation business located in the United States, Mexico and Canada. This strategic move will include obtaining intellectual property, long-term customer agreements related to Horizontal Stabilizer Trim Actuation (HSTA) systems, operational assets and skilled talent. These systems play a critical role in aircraft stabilization, ensuring safe and efficient flight operations, with notable applications like the Airbus A350.
WWD Trades at a Discount
WWD stock is trading at a discount, with a forward 12-month Price/Earnings of 27.04X compared with the industry’s 37.25X, making it an attractive investment opportunity.
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Volatile China Business Concerning for WWD
Volatile China on-highway natural gas truck market, global macroeconomic weakness and rising costs are concerns. Weaker demand for heavy-duty trucks in China this quarter led to higher inventory levels at customers. This caused a decline in China on-highway orders for the fiscal fourth quarter. Sales for on-highway natural gas trucks in China were $22 million in the fiscal fourth quarter.
Management expects a further decline in the fiscal first quarter of 2025 due to weak local economic health and a narrowing fuel price spread. Sales from this business are expected to be $5 million in the current quarter. Full-year revenues from China on-highway natural gas trucks are forecasted to be $40 million for the year, indicating a significant decline of $175 million from fiscal 2024. As a result, Industrial segment revenues are expected to decline in the band of 7-11%. Also, indications of a slowdown in overall demand within the oil and gas sector do not bode well.
Stiff Competition & Concentration Risks
Weakness prevailing over global macroeconomic conditions and stiff competition in the aerospace-defense equipment space from the likes of Leonardo DRS, Inc. DRS, Triumph Group, Inc. TGI and Curtiss-Wright Corporation CW remain concerning.
Woodward caters to fewer customers compared to companies with similar sales volume. Around 35% of the company’s annual consolidated net sales came from its five largest customers in fiscal 2024. Therefore, loss of any one of its customers will have a material impact on its operational results.
Mixed Estimate Revision Activity for WWD
Analysts are bearish about the stock, which is evident from the downward revision in earnings estimates.
In the past 60 days, analysts have decreased their earnings estimates for the current and the next quarter by 8.9% and 1.4% to $1.12 and $1.45 per share, respectively. The same for the current year has been revised upward by 0.7% to $5.98 per share.
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How Should Investors Approach WWD Stock?
Though strength in aerospace business and discounted valuation are pros, the challenges within China on-highway natural gas truck market and softness in oil and gas is an overhang on the overall performance.
Consequently, it may not be a prudent investment decision to bet on the stock, which carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, stakeholders and investors already owning the stock could stay put as long-term prospects for WWD appear promising.
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