Rating Update: Stock Rating A-Highest (5/16/19)-Moog Inc. (MOG.A).

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BUSINESS

Moog Inc. designs, manufactures, and integrates precision motion and fluid controls and systems for original equipment manufacturers and end users in the aerospace, defense, and industrial markets worldwide. Its Aircraft Controls segment offers primary and secondary flight controls for military and commercial aircrafts; aftermarket support services; and ground-based navigation aids. The company’s Space and Defense Controls segment provides controls for satellites, space vehicles, launch vehicles, armored combat vehicles, tactical and strategic missiles, security and surveillance, and other defense applications; and gun aiming, stabilization, and automatic ammunition loading for armored combat vehicles. This segment also offers steering tactical and strategic missiles; and weapons stores management systems for light attack aerial reconnaissance, ground, and sea platforms.
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INVESTMENT RATING

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MOG.A is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Moog has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Moog has a neutral Appreciation Score of 49 but a very high Power Rating of 91, and the Highest Value Trend Rating results.

Moog’s stock is selling below targeted value. The current stock price of $86.50 compares to targeted value 12 months forward of $108.
This neutral appreciation potential results in an appreciation score of 49 (51% of the universe has greater appreciation potential.)
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Moog has a Power Rating of 91. (Moog’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 9% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; is in a strong phase current; and earnings estimate behavior for Moog has been slightly favorable recently.

INVESTMENT PROFILE

Moog’s financial strength is average. Financial strength rating is 47.
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Relative to the S&P 500 Composite, Moog Inc. has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that MOG.A is higher risk. Low earnings variability is a positive for Moog. Relative weaknesses include: low financial strength, high stock price volatility, low expected growth, and low historical growth. Moog’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. MOG.A has unusually low market capitalization.

CURRENT SIGNALS

Moog’s current operations are stable. Return on equity is falling, reflecting: and falling tax keep rate.

Moog’s current technical position is very strong. The stock price is in a 3.7 month up move. The stock has appreciated 32.6% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Important negative changes in Moog Inc. (NYSE: MOG.A) investment behavior have recently occurred: negative upside/downside volume developed.
Positive development: significant quarterly earnings acceleration occurred. Negative development: the consensus estimate for September, 2019 decreased significantly.
The stock is currently rated A.
Moog Inc. (NYSE: MOG.A) stock closed at $0.66 on 5/16/19 after a major increase of 18.7%. Moreover, above average trading volume at 122% of normal accompanied the advance. The stock has declined -5.0% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, Moog experienced a very significant reduction in cash of -$242.5 million (-66%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$349.5 million. Non-operating uses consumed -$41.3 million (-12% of EBITDA). Cash taxes consumed -$54.1 million (-15% of EBITDA). Re-investment in the business amounted to -$280.4 million (-80% of EBITDA). On a net basis, debt investors received -$130.5 million (-37% of EBITDA) while equity investors removed -$85.8 million (-25% of EBITDA).
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Moog’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Moog Inc. Peer Group. (Since 2016 Non-operating Income, %EBITDA has acccelerated.) In most years, Moog was in the second quartile and lower quartile. Currently, Moog is lower quartile at -12% of EBITDA (-$41.3 million).

Moog’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Moog Inc. Peer Group. In most years, Moog was in the third quartile and top quartile. Currently, Moog is slightly above median at -15% of EBITDA (-$54.1 million).

Moog’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Moog Inc. Peer Group. (Since 2015 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, Moog was in the third quartile and top quartile. Currently, Moog is substantially below median at -80% of EBITDA (-$280.4 million).

Moog’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Moog Inc. Peer Group. In most years, Moog was in the third quartile and top quartile. Currently, Moog is substantially below median at -37% of EBITDA (-$130.5 million).

Moog’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Moog Inc. Peer Group. In most years, Moog was in the top quartile and lower quartile. Currently, Moog is below median at -25% of EBITDA (-$85.8 million).

Moog’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Moog Inc. Peer Group. In most years, Moog was in the third quartile and top quartile. Currently, Moog is lower quartile at -69% of EBITDA (-$242.5 million).
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Moog’s Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Moog Inc. Peer Group. In most years, Moog was in the third quartile and top quartile. Currently, Moog is at the lower quartile at +5%.

PROFITABILITY

Moog’s return on equity has improved modestly since 2009.
This modest improvement was due to strong positive trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of Moog’s assets rose over the full period 2009-2019: asset turnover has exhibited a minor overall uptrend.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
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Moog’s return on equity is above median (12.8%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is above median (7.4%) reflecting asset turnover that is at median (0.92X) and at median pretax margin (8.0%).
Tax “keep” rate (income tax management) is at median (74.8%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is at median (2.31X).

GROWTH RATES

There are no significant differences between Moog’s longer term growth and growth in recent years.
Moog’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 6.5% per year.

Total asset growth has been 4.6% per year.

Annual E.P.S. growth has been 6.0% per year.

Equity growth has been 3.9% per year. (More recently it has been 10.1%.)

Moog’s consensus growth rate forecast (average of Wall Street analysts) is 4.6% — in line with the average of the historical growth measures.
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Relative to the Moog Inc. Peer Group, Moog’s historical growth measures are erratic. Revenue growth (6.5%) has been upper quartile. E.P.S. growth (6.0%) has been above median. Total asset growth (4.6%) has been at median. Equity growth (3.9%) has been below median.

Consensus growth forecast (4.6%) is lower quartile.
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PRICE HISTORY

Over the full time period, Moog’s stock price performance has been variable and slightly below market. Between July, 2008 and May, 2019, Moog’s stock price rose +95%; relative to the market, this was a -14% loss. Significant price moves during the period: 1) February, 2016 – January, 2018: +109%; 2) July, 2012 – October, 2014: +110%; 3) March, 2009 – March, 2011: +101%; and 4) August, 2008 – March, 2009: -52%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 15.6% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through April, 2019 of 15.6% is above median relative to Moog Inc. Peer Group.

Current 5-year total return performance of 7.7% is below median relative to the S&P 500 Composite.
Through April, 2019, with below median current 5-year total return of 7.7% relative to S&P 500 Composite, Moog’s total return performance is at the upper quartile relative to Moog Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, MOG.A’s overall valuation is low. The highest factor, the price/earnings ratio, is below median. Ratio of enterprise value/earnings before interest and taxes is near the lower quartile. Ratio of enterprise value/assets is below median. Price/equity ratio is near the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.

Relative to Moog Inc. Peer Group, MOG.A’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is slightly above median. Price/equity ratio is at median. Ratio of enterprise value/revenue is below median. Ratio of enterprise value/earnings before interest and taxes is below median. The lowest factor, the price/earnings ratio, is below median.
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Moog has a minor value gap compared to the median valuation. For MOG.A to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.26X to 1.31X. If MOG.A’s ratio of enterprise value/revenue were to rise to 1.31X, its stock price would be lower by $4 to $91.
For MOG.A to hit lower quartile valuation relative to the Moog Inc. Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.26X to 1.11X. If MOG.A’s ratio of enterprise value/revenue were to fall to 1.11X, its stock price would decline by $-13 from the current level of $86.

VALUE TARGETS

MOG.A is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Moog’s current Price Target of $111 represents a +28% change from the current price of $86.50.
This neutral appreciation potential results in an appreciation score of 49 (51% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 49, the high Power Rating of 91 results in an Value Trend Rating of A.
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Moog’s current Price Target is $111 (+27% from the 2018 Target of $87 and +28% from the 05/16/19 price of $86.50). This rise in the Target is the result of a +6% increase in the equity base and a +20% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 16.9% — above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2010 low of 10%.

PTR’s growth forecast is 5.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2010 peak of 9%.

PTR’s cost of equity forecast is 8.5% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is steady at the 2010 low of 7.4%.
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At Moog’s current price of $86.50, investors are placing a positive value of $19 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 13.4% versus a cost of equity of 7.4%.
PTR’s 2020 Price Target of $111 is based on these forecasts and reflects an estimated value of existing assets of $79 and a value of future investments of $32.

About John Lafferty 35825 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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