1 Under-the-Radar Aerospace Stock Soaring

When Stanley Druckenmiller revealed that his family office had taken a stake in Woodward, some head-scratching followed. What was one of the greatest investors in the world doing buying an aerospace and industrials stock?

With about 6 weeks of news being released that Woodward was among his top buys for Q1, the stock took off and perhaps it’s no surprise why as you’re about to find out.

The big question is whether it will continue its march higher.

Key Points

• Woodward’s long-term partnerships with major OEMs and integration into key supply chains provide a durable competitive advantage.
• Solid financial growth with a 5% annual revenue increase and improved operating margins have led to strong free cash flow and shareholder returns.
• Woodward is poised for growth in renewable energy and aerospace sectors, with substantial international expansion opportunities and projected annual earnings growth of 19% over the next five years.

Why Woodward Is Such a Good Buy

Woodward is a technological leader but that alone doesn’t confer upon it a wide moat. What makes the company special from an investor perspective is its long-standing relationships with major OEMs (Original Equipment Manufacturers).

What the ordinary investor doesn’t necessarily see but no doubt Druckenmiller has is that Woodward is deeply integrated into the supply chains of key aerospace and industrial clients. Indeed, its proprietary technologies and patented solutions translate to a competitive edge that is hard to replicate.

Those advantages have resulted in strong financials. For example, over the past five years, Woodward has grown its top line at a compound annual growth rate of approximately 5%, driven by increased demand in both the aerospace and industrial sectors. But more impressively, operating margin has improved from 10% in 2018 to 13% last year.

The combination of those two factors has resulted in strong free cash flow that has reduced debt and returned capital to shareholders in the form of dividends and a share buyback.

Will Woodward Keep Rising?

Woodward’s industrial segment, comprising 40% of revenue, is experiencing growth driven by increased investments in renewable energy, power generation, and industrial automation. Meanwhile its aerospace segment that accounts for approximately 60% of total revenue, is already benefiting from the recovery in air travel.

Going forward, Woodward has opportunities to grow internationally, especially in Asia and Europe. Heightened infrastructure investments and rising demand for advanced energy solutions are key drivers.

It’s clear that Druckenmiller’s conviction is growing because during the first quarter of 2024, he added 549,595 shares to his existing holdings, which brought his total to 954,230 shares.

So, what are the two key factors that we think Stanley is looking at beyond those mentioned? Firstly, earnings growth of 19% is forecast annually over the next 5 years. That’s a really high number for such a firm as Woodward and, secondly, it means the PEG is just 0.26, suggesting it remains substantially undervalued.

Stanley likes both a good-looking chart and a stock with upside potential fundamentally. Woodward seems to check both boxes.