1 Stock That Will Continue to Struggle
Avionics supplier Rockwell Collins (NYS: COL) managed to report double-digit bottom-line growth in its third quarter -- despite falling sales. While profits were helped by high demand for commercial systems, lower defense spending contributed to the overall weakness in revenue.
The company also narrowed its fiscal-year outlook. Fools are urged to be cautious about this stock going forward.
The quarter unfolds
Revenue for the quarter dropped by 1.5%, year-on-year, to $1.2 billion. The drop in revenue was mainly due to lower government deliveries, project cancellations, and delays in funding tied to U.S. government work. The commercial systems fared well, reporting sales worth $522 million, a 15% increase over the year-ago quarter. However, revenue from defense systems, which normally comprise 56% of the sales, weighed on overall sales.
Operating income rose 18% to $248 million. Profits were further buoyed by strong demand for aviation parts from plane makers. Net income came in at $158 million, up 11% from a year ago.
Rockwell ended the quarter with cash and cash equivalents of $268 million, a 12% drop compared to the year-ago quarter. Cash from operations went down 26% to $119 million. Increased spending on inventories and preproduction engineering along with the payment of incentive compensation caused the cash levels to go down.
However, the current ratio has risen to 1.9 times from the year ago quarter's 1.8 times, suggesting slightly improving liquidity. Debt-to-capital marginally increased, to 25.9%. But with an interest coverage ratio of 45.2 times, compared to the year-ago quarter's 40.8 times, the company seems pretty well placed to service debts.
Meanwhile, higher demand for air travel and cargo services suggests the commercial aerospace market has entered the recovery phase. Peer Astronics (NAS: ATRO) , whose revenue was helped by demand for cabin electronics sales for commercial airlines, had echoed similar sentiments in its fourth-quarter results.
The fact is that global defense spending is under stress as the U.S. and other nations are trying to reduce budget deficits. So, the company is likely to see a trend of dropping sales in its defense category, though the commercial segment might produce a powerful turnaround. The planned sale of Rockwell's Rollmet product line, which offers propulsion system components, will pull sales down.
The Foolish bottom line
The picture for Rockwell is pretty dull at the moment. Defense spending is likely to be on the lower side. In such a scenario, sales may continue the downhill journey. Fools are advised to think this stock through before committing.
At the time this article was published Fool contributor Debarati Bose does not own shares of any of the companies mentioned in the article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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