Goodrich: Gaining Altitude

S&P likes the aerospace & defense equipment outfit's long-term growth prospects and rates the shares strong buy

by Richard Tortoriello From Standard & Poor's Equity Research

We believe Goodrich (GR; recent price, $64) offers investors the opportunity to capitalize on long-term growth in both the commercial aerospace and defense markets. We also like the company for its continuing growth in three key measures: return on invested capital, profit margins, and free cash flow. Given our expectation of about 15% earnings-per-share growth over the next three years, we view the stock as attractive at current price levels. The stock carries Standard & Poor's highest investment recommendation of 5 STARS (strong buy).

Company Profile

Goodrich is one of the world's largest providers of equipment, parts, and services to the large commercial, regional, business, and military jet markets. The company operates through three business segments:

The Nacelles and Interior Systems (N&IS) segment (33% of estimated 2007 sales and 50% of segment operating profits) produces aerostructures and engineered polymer products; and aircraft interior products, lighting systems, and cargo systems. The aerostructures business includes nacelles (engine housings); thrust reversers; pylons; and maintenance, repair, and overhaul services. Aircraft interior products include evacuation slides and life rafts, complete air crew escape systems, and seating systems. The cargo systems business unit produces fully integrated main deck and lower lobe cargo systems for widebody aircraft. The customer service business unit sells aftermarket parts. N&IS's largest customers include Airbus (EAD.PA), Boeing (BA), Rolls-Royce, and global airlines. Primary competitors in this market include the Hamilton Sunstrand division of United Technologies (UTX), Britain's BAE Systems (BAES.L), and Honeywell (HON).

Actuation and Landing Systems (A&LS) (39% and 26%) consists of landing gear, aircraft wheels and brakes, actuation systems, aviation technical services, and engine components, including turbine fuel technologies, turbomachinery products, and power transmission products. Several business units within this segment are linked by their ability to contribute to the integration, design, manufacture, and service of entire aircraft undercarriage systems, including landing gear, wheels and brakes, and certain brake controls. A&LS and Messier-Dowty (a division of France's SNECMA) each control about 50% of the global landing gear market. The unit is also a major global provider of aircraft maintenance, repair, and overhaul (MRO) services. A&LS's MRO customers mostly comprise the world's major airlines and aircraft leasing companies. Primary aircraft MRO competitors include TIMCO Aviation Services, SIA Engineering, Singapore Technologies Engineering, and Lufthansa Technik (LHA).

Electronic Systems (28% and 24%) makes mostly equipment that either controls or monitors the performance of aircraft. Included are a variety of sensor systems that measure and manage aircraft fuel and monitor oil debris, engine, and transmission structural health. In addition, it is a major maker of inflatable evacuation slides and ice detection equipment, and a maker of systems that produce and control electrical power. The unit also includes engine control systems, such as fuel controls and engine health monitoring systems. Primary competitors include Smiths Group (a British unit of General Electric (GE), Parker-Hannifin (PH), and Honeywell.