Moog Inc., (MOG.A.N), headquartered near Buffalo, N.Y., is a worldwide designer, manufacturer, and integrator of precision motion control products and systems. Founded in 1951, its systems are now used in a wide range of products, including military and commercial aircraft, satellites and space vehicles, missiles, marine applications and medical equipment. Defense still accounts for about one-third of the business and it looks like the federal sequestration spending cuts may mean an earnings miss when Moog reports fiscal Q1 results on Jan. 20.
Addressing the sequestration issue, President and CEO John Scannell said on the latest conference call in December that “despite our best efforts, we, I think, like everybody else, really don’t have a good sense of how that is going to play out.” The effect is likely to be felt in 2014, and StarMine is showing a negative Predicted Surprise of 4.2% for first quarter earnings.
The chart below shows that analysts have been lowering their estimates over the past 90 days. The I/B/E/S consensus has fallen by 3 cents to 87 cents a share from 90 cents. The SmartEstimate has fallen even more to 84 cents a share. There is a 5-star rated analyst who has an estimate of 78 cents per share that is far below the consensus, and given the strong track history of this analyst, one might want to pay more attention to his estimate. We call such an estimate a Bold Estimate, since analysts rarely issue estimates that are so far from the mean. It’s possible that other analysts will follow suit and the consensus estimate will move even lower.
Source: Eikon/StarMine
Pension expenses – a warning flag
One expense that’s a drag on Moog earnings is pension expense. Pension costs have more than doubled in the last five years from less than $40 million in 2009 to more than$80 million in the most recent quarter, which accounted for more than 3% of sales in a low-margin business. The ratio of the underfunded pension liability to equity is .18. That means that Moog will have to put more money aside, eventually, to fund those pension expenses.
Source: Eikon/StarMine
Not a cheap stock
The company does not seem cheap either — the forward 12M P/E ratio is 16. That is above the five year median of 12.5. In an uncertain defense industry environment, that kind of P/E ratio could be an indication that the stock may still overvalued. Using the StarMine Intrinsic Value (IV) Model, one can use the current market prices to calculate what the growth rate, which would represent the 10-year earnings growth rate required to justify the current market price, also called the market implied growth rate. That turns out to be 11%, which is above the StarMine calculated 10 year growth rate (the SmartGrowth rate) of 9%, another sign that the stock may not be cheap.
Source: Eikon/StarMine
Another earnings drag
Airbus and Boeing have both announced record order books for their new planes. As airlines look to modernize their fleets, maintenance costs are likely to fall, since the planes are usually under warranty in the first few years. On the earnings call, Scannell pointed to this as being an earnings drag for Moog for the coming few years. Moog provides parts and services for consumer aircraft, and as long as these planes are under warranty, that part of the business is not likely to grow. While the business has upside once these fleets age, for now it looks like earnings may miss the mark in the near term.
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