Rockwell Collins Inc. (COL), a supplier of avionics and military equipment, posted earnings barely better than expected for the third-quarter 2010 ending on June 30. Support came from recovery in the commercial airspace market and steady progress in defense business.
Street analysts had more than a week to digest the news. Below, we cover the earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock.
Earnings Report Review
Rockwell Collins outpaced the Zacks Consensus Estimate of 88 cents with earnings of 89 cents per share in the third quarter ending June 30, 2010. However, earnings per share shrunk 3 cents compared with the prior-year quarter. Total sales rose by 12% or $130 million, to $1.2 billion compared with sales of $1.1 billion in the year-ago quarter.
Operating margin was 18.8% compared with 21.5% in the year-ago period. Overall, Rockwell Collins reported a net income of $142 million, a decrease of $3 million, or 2% compared with the year-ago quarter.
Rockwell Collins witnessed growth across both the Government Systems and Commercial Systems posting year-over-year growth in revenues. Government Systems registered robust year-over-year growth of 16% driven primarily by growth in the Surface solutions portfolio. Commercial Systems revenue increased over 6%, the first quarter to experience a year-over-year growth since the fourth quarter of 2008. This was due to sales increases with OEM customers and significant growth in business and regional jet aftermarket sales.
(Read our full coverage on this earnings report: Rockwell Collins Edged Past Ests)
Agreement of Analysts
There were no major surprises in Rockwell Collins earnings, which outpaced the street by a cent in the reported quarter. However, the near-term picture is far from rosy for the company. The street discounting the volatility in capital markets, uncertainty about the strength of global economic recovery and the potential impact of tightening government budgets worldwide have been instrumental in reducing their estimate post earnings.
Of the 20 analysts covering the stock for the ongoing quarter, 1 analyst raised while 13 lowered their estimates in the last 7 days. Also, for full-year 2010, 10 out of 17 analysts have downgraded their estimates in the last 7 days.
Magnitude of Estimate Revisions
The magnitude of estimate revisions indicates that the analysts were apprehensive about Rockwell Collins’ near-term prospects. In the near-term, though passenger traffic is expected to rise modestly, the market is unanimous that airlines total capacity has fallen primarily due to a reduction in utilization of out-of-warranty aircraft. This is bad news for the company which generates a chunk of its revenue from aircraft retrofit programs. Fortunes at the Government Systems segment are also likely to be affected by change in defense funding profiles of countries like Italy which are under pressure to reduce their defense spending.
Consequently, the Zacks Consensus Estimate has been on a slippery slope since the earnings release. In the last 7 days, the Zacks Consensus Estimate for the fourth quarter fell 4 cents and for fiscal 2010 ending September 30, 2010, it decreased 5 cents.
The current Zacks Consensus Estimate for fourth quarter 2010 ranges from 92 cents to $1.05. For fiscal 2010, the estimates range from $3.55 to $3.50.
Our Take
Rockwell Collins’ fortunes are tied to the cyclical commercial aerospace market, which is currently undergoing a steady recovery. As per The Boeing Company’s (BA) Current Market Outlook (CMO) the world economy will continue to rebound, growing above the long-term trend in 2010.
Boeing pointed out that airlines will see a rebound in passenger and cargo traffic revenue this year and should return to profitability in 2011. This would come as a welcome relief for Rockwell Collins, for it generated 42% of its fiscal 2009 revenue from aircraft manufacturing; airlines; and business jet owners/operators.
The touch of optimism in Rockwell Collins gets reflected by the revised upward guidance for fiscal 2010 ending on September 30, 2010. Total sales are now expected to be about $4.7 billion compared with the earlier guidance range of $4.6 billion – $4.8 billion. Operating margins are now expected to be about 19% in comparison to the earlier guidance range of 18.5% – 19.5%. Earnings per share are now expected to be about $3.50 from the previous guidance range of $3.35 – $3.55.
In the near term however, risks regarding realignment of defense budget focus, pace of business jet market recovery, tepid air transport aftermarket sales growth will affect the fortunes of Rockwell Collins, a Zacks #3 Rank (Hold) stock. We currently have a long-term (6 months and higher) Neutral recommendation on Rockwell Collins.
Read the full analyst report on "COL"
Zacks Investment Research
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