Easier Said Than Done at Rockwell Collins
Rockwell Collins (NYS: COL) sounds pretty upbeat about its prospects for the near future. The company expects decent revenue and earnings growth in the coming financial year, and it has backed its financial guidance by authorizing a $700 million repurchase of its common stock.
I'd be a little wary, though.
For fiscal 2012, Rockwell Collins has projected revenue in the range of $4.9 billion to $5 billion and earnings per share of about $4.40 to $4.60.
In the face of a protracted economic downturn, Rockwell's outlook sounds impressive. But there are points for concern, too. As the Pentagon tightens defense spending, the company projects a revenue decline in its government system business. That could be of concern to peers Northrop Grumman (NYS: NOC) , L-3 Communications (NYS: LLL) , and General Dynamics (NYS: GD) as well, since they also derive significant portions of their revenues from government contracts. Rockwell's commercial-systems business is expected to show healthy growth with a 2.5% operating-margin increase.
What happens now
The company plans to fund the repurchase using a combination of cash and debt. A high interest coverage ratio safeguards the company against any risk caused by an increase in debt. But the way I see it, although the buyback will decrease Rockwell Collins' outstanding equity and boost earnings per share, it will only marginally benefit. Its stock seems only slightly undervalued, given the weak outlook for its industry, whose P/E is 14.0 while its own P/E stands at 13.2.
I would like to caution that a $51 million repurchase authorization already remains from its previous buyback plan. Moreover, given Rockwell's cash position and free cash flow, it'll probably take a year or more to complete the program without straining its liquidity or borrowing money.
The Foolish takeaway
Rockwell Collins, like many other companies, is trying to use a buyback as a tool to offset the impact of declining stock prices. There will be short-term benefits, but whether Rockwell is a good deal for its money remains to be seen.
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At the time this article was published Fool contributor Abantika Chatterjee owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of L-3 Communications Holdings, General Dynamics, and Northrop Grumman.Motley Fool newsletter serviceshave recommended buying shares of L-3 Communications Holdings. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.