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Esterline: Room to Climb

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While Esterline Technologies (ESL) is a global supplier of vital products to the huge aerospace and defense markets, it's hardly a household name or a favorite of investors. But to some pros, it's a timely technology play that has yet to catch up with the rising tech stars. "It's cheap, with promising growth and a solid balance sheet," says Scott Black, president of Delphi Management, who owns shares. The stock, at 28.35, is trading at just 8 times 2010 earnings estimates of $3.50 a share--well below its historical price-earnings trading range of 10 to 15, notes Black. Its major customers include Boeing (BA), Airbus, Lockheed Martin (LMT), and the U.S. military, supplying specialized products such as cockpit components for commercial and military aircraft, and electronic gear that fighter jets and other military planes use to foil attackers.

Peter Jacobs of Wells Fargo Investments (WFC), who rates Esterline a buy, says while a potential drop in aircraft production and slow defense spending are a worry, he is comforted by the fact that 30% of sales are aftermarket, 10% retrofit, and 20% consumables, such as flares and combustible cartridge cases. So it can better absorb changes in defense funding for any project. His 12-month target is 39 based on his profit estimate of $3 a share in 2009, $3.50 in 2010, and $3.70 in 2011.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

Continental's Cloud Cover

Analysts were surprised and disappointed when Continental Airlines (CAL) Chairman and CEO Larry Kellner disclosed on July 16 that he was stepping down on Jan. 1. But the stock hardly budged, staying at 9.22 a share. "We don't anticipate a change in direction at the company," says Helane Becker, managing director at Jesup & Lamont, "but the question of when demand for business travel will come back is a worry."

Daniel McKenzie of Next Generation Equity Research warns that the stock is poised for a pullback as Continental faces just a "modest" revenue recovery. He rates the stock a sell with a target of 8. McKenzie sees Continental losing $3.05 a share in 2009 vs. consensus estimates of a $1.50 loss. It lost $3.32 in 2008. President Jeff Smisek, who will replace Kellner, says he's committed to maintaining Continental's service-oriented focus.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

Paper Profits at Clearwater

After Potlatch (PCH) spun off Clearwater Paper (CLW), a maker of tissue paper and paperboard, in December 2008, the newly minted company started trading at 22.50 a share. But in only three weeks the stock hit 7 amid the market meltdown, and by Mar. 10 it reached a 52-week low of 5.93. But its recovery was just as swift: By July 21 it had leaped to 32.71, after beating first-quarter forecasts. Some think it has peaked, but not Chris Hackett of Hackett's Special Situation Report, who rates it a buy. Based on assets, free cash flow, and earnings forecasts, Clearwater is worth 50, he figures. Its tissue paper business generated $37 million in operating earnings in 2008, and its paperboard $19 million. In 2008, Clearwater posted profits of $9.7 million, or 86 cents a share.

Steven Chercover of D.A. Davidson figures Clearwater will earn $2.98 a share in 2009 and $3.08 in 2010. He is neutral on the stock.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

—Gene Marcial

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