Curtiss-Wright Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global integrated business that provides highly engineered products, solutions, and services mainly to aerospace, defense, and industrial customers, emphasizing cutting-edge tech, precision manufacturing, and strong relationships.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Curtiss-Wright’s business is organized into three segments: Aerospace & Industrial, Defense Electronics, and Naval & Power, each serving distinct markets with unique demands. This diversified structure, which is a good sign, attempts to mitigate risks associated with any single industry and capitalize on different market dynamics, but also adds some complexity to the business itself.

  • Aerospace & Industrial: This segment provides highly engineered products for commercial aerospace and industrial markets, focusing on components for aircraft, such as actuators and control systems.
  • Defense Electronics: This segment supplies defense systems and products in areas like radar, navigation, and electronic warfare.
  • Naval & Power: This segment is focused on nuclear power, naval propulsion systems, and related equipment. This one typically has higher and more stable margins than the others.

Moat Analysis: 3/5

Curtiss-Wright possesses what can be described as a narrow-to-solid moat, built primarily on factors that, while present, aren’t impenetrable:

  1. Customer Intimacy and Long-Term Relationships: Curtiss-Wright has cultivated long-standing relationships with key clients, especially in the aerospace, defense, and nuclear industries. This is not easily duplicated because it involves extensive customer-specific and product-specific experience. It creates some switching costs for companies, and some companies do stick to specific products from certain providers because of regulatory needs. This moat can be categorized as a “medium switching costs” moat.
  2. Specialized Products and Niche Markets: The firm’s specialization in niche areas like nuclear propulsion and naval equipment provides a barrier to entry. Developing specialized systems that meet rigorous industry standards are often expensive and time-consuming, making it difficult for new companies to compete. They also have a niche position in some markets, such as a supplier for the US Defense. The economic moat of a niche is quite wide, but not for the whole business.
  • For example, Curtiss-Wright is essentially the sole supplier of control rod drive mechanisms for the U.S. Navy’s nuclear-powered fleet, creating a strong competitive position. This has been proven by a new deal worth around $80 million in the last earnings call.
    1. Technological Expertise and R&D: Curtiss-Wright invests heavily in research and development to create new and improved products, which is crucial for the industries in which it operates. They recently announced a joint project with the University of Sheffield. This leads to a continuous stream of differentiated products and creates some cost advantages. They tend to sell complex, high-precision systems. But, R&D is not that hard to copy or circumvent.
    2. Scale Economies: In certain parts of its business, they have decent scale. For example, their naval business, being a big player, gets more work than the smaller companies and more negotiating power. They are a strong player in multiple global markets.

Overall, the moat, while not incredibly strong, is very decent and offers a competitive edge to the company. They are good in some specific areas and not so much in others, so it’s a bit mixed, and can change according to the business segments.

Risks and Business Resilience

Despite its solid position, Curtiss-Wright faces some legitimate risks that could erode its moat and impact business resilience. It has to be constantly monitored by investors:

  1. Technological Obsolescence: In the technology and software-heavy fields of aerospace and defense, rapid innovation can quickly render a company’s products obsolete. To stay relevant, Curtiss-Wright must sustain a high pace of R&D, while being at the forefront of technological advancement. Failing at this point could lead to a collapse of their moat.

Specifically, as the defense sector is pushing for higher electrification in platforms, the company has to be at the edge of this technology and supply chain.

  1. Customer Concentration: Curtiss-Wright relies heavily on long-term contracts with government agencies, and on a small number of clients from the private sector. This can lead to volatility in the company’s cash flows and also impacts growth opportunities. If some government projects are cut, the company may have to suffer a bit and it may lead to a decline in their moat.
  2. Geopolitical Risk: Particularly in the defense and energy sectors, sales are heavily influenced by government policy and geopolitical events, making sales predictions very difficult. This is an ever present, difficult to manage risk.
  3. Cyclicality: As an industrial company, Curtiss-Wright’s business is susceptible to economic cycles and fluctuation in their clients businesses, which directly affects ROIC and revenues.
  4. Acquisition Integration: As they keep growing through acquisitions, the management’s ability to integrate new businesses is key. This is also key to value creation, because synergies should be effectively and quickly implemented. This point is often a threat.
  5. Competition: Competition in all areas they work is very strong and could hinder growth. For instance, in the defense area, they compete directly with huge corporations, with large budgets in R&D.

The company has a great history of innovation and has been able to survive many major economic downturns. But, to protect their moat they need to keep innovating, maintain low costs, and continue to focus on customer intimacy.

Business Deep Dive

Curtiss-Wright is a global company providing engineering and manufacturing services, mostly to aerospace, defense, and industrial sectors.

  1. Revenue Distribution

The revenue for Curtiss-Wright is distributed between three segments, and all the segments contributed in a fairly equal manner.

*   Aerospace & Industrial, contributing 37% (2.65 billion in revenues)
*   Defense Electronics, contributing 32.9% (2.35 billion in revenues)
*   Naval & Power contributing 30.1% (2.15 billion in revenues)

    *   The above revenue breakdown is as of 2023 YTD.
  1. Trends in the Industry
    • The Aerospace and defense industries are both seeing growth, though with higher competition. The commercial aerospace market is also seeing a recovery, with more orders coming in for new planes. They are heavily affected by government policies, regulations, and geopolitical risks.
    • The nuclear power sector is currently on the rise, as governments turn back to nuclear energy for carbon free energy production. The increase in demand is expected to grow substantially during the next few years.
  2. Margins:
    • Operating margins are 16%, with variations among the business segments.
    • Aerospace and industrial: margins are at 16.2%. * Defense Electronics: margins are at 17.4%
    • Naval & Power: margins are 16.6%
      • All data is based on the latest earnings call (2024 Q3)
        • It seems that their operating margins have been growing and are expected to keep growing in the next few years, with more long-term contracts being started.
        • Their operating income margins have been ranging from 16% to 19% since the start of 2021. They have been performing well.
  3. Competitive Landscape:
    • They face large competition in all areas. In the aerospace market they compete with big giants like Boeing. In the defense market, it competes with all the giants from the US Defense Industry. And in the energy sector, there is heavy competition from all the energy companies, which are trying to innovate in their businesses to gain market share. But they do have a competitive edge because of their focus on niche products.
  4. What Makes the Company Different:
    • Their specialization in complex systems, especially for military applications, gives them an edge over the rest. In the defense sector they produce highly specialized systems for avionics, navigation, communication, weapons control, and fire control. Their high margins from the Naval & Power segments makes it unique. In the aerospace segment, their control systems, landing gear components and structural components allow them to provide important tech to airplane manufacturers. They also have a strong history of innovation.
  5. Other relevant information
    • The company has a lot of acquisitions, which have helped them grow and develop a more diversified business profile.
    • They are committed to returning value to shareholders through share buybacks and dividend payments. For the last few years, they have been increasing their share buybacks and dividends.
    • The CEO of the company recently mentioned they are expanding into international markets, and they are confident that their products have immense demand globally.
  • The biggest issue with the company is their revenue mix. For a growing company they have a rather low organic growth, which is mostly made up by acquisitions. The revenue should have had a mix of organic growth and acquisitions. A company with too much acquisition-based growth is a concern, as the revenue should grow naturally as well.
  • They have seen some slowdown in the defense segment in recent quarters, but have said that the order intake is high. They expect the slowdown to be temporary. *They are expecting increased sales due to the increase in investment in the nuclear sector. This was highlighted in the latest earnings call.
  1. Financials:
    • The company shows revenue growth YoY. Their latest quarterly revenue was $674 million, up from $640 million YoY, representing an increase of around 5%. It’s not that high, but is showing good progress given the circumstances.
    • Their backlog is solid and is at more than $5 billion in current orders.
    • They are also profitable, reporting a net income of $48.5 million in the last quarter.
    • Their debt is at $1.7 billion, which is not bad considering their overall financial strength. Their debt-to-equity is around 10%, which is fairly low. Their cash-to-debt ratio is around 0.15, which is decent for an industry like this.
    • They are very good in returning capital to shareholders in the form of buybacks and dividends.
    • Overall, the financials look decent and consistent, though their low organic revenue growth and acquisitions-based business model can be a slight concern.

Understandability Rating: 3 / 5

The business is moderately complex. It requires understanding of various engineering and manufacturing processes, different industries and their dynamics, government and international contracts. Analyzing their financials is a complex process, with lots of special charges and amortization. * To understand the financial health, one must dive deep into the balance sheet, revenue and income statements, which are also complex.

  • However, the business isn’t as complicated as some technology companies that use more obscure processes. The industry, although complex, also has fairly simple concepts, easy to explain and learn. A person with some knowledge about finance and different industrial companies can understand it without too much difficulty, after putting in some effort.

Balance Sheet Health: 4 / 5

The balance sheet of the company is healthy and relatively stable. * They have a good cash balance, that allows them flexibility to make acquisitions and invest in their own business. * The debt-to-equity ratio is about 10%, which is not bad and is reasonable. * Their financial ratios are steady and showing positive growth.

  • Their historical financials are also good and indicate that they are managed well.
    • They are generating ample cash and have stable financials, making their financial health solid.
    • They seem to be managed well, and are unlikely to face any financial distress in the near future.