MOOG Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

A global designer, manufacturer, and systems integrator of high-performance precision motion and fluid controls and systems for a broad range of applications in aerospace and defense, as well as industrial markets.

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.

Moog Inc. operates within the aerospace and defense industry, which is typically characterized by strong barriers to entry but can be cyclical. The company’s expertise lies in creating high-performance, precision motion and fluid control systems.

Business Overview

Revenue Distribution

Moog’s revenue streams are diverse across three primary segments, each catering to distinct needs:

  • Aircraft Controls (45-50% of sales): This segment designs, manufactures, and integrates primary and secondary flight controls and components for military aircraft, manned weapon systems, tactical and strategic missile steering controls and various other commercial aircraft.
  • Space and Defense Controls (35-40% of sales): This includes controls for satellites, launch vehicles and components, as well as integrated missile systems, where the components and systems are subject to harsh environments and demanding requirements.
  • Industrial Systems (10-15% of sales): In this segment the company has a wide variety of applications including machine tools, automation, power generation and distribution, industrial vehicles, and medical equipment.

A majority of their revenues comes from sales to government defense contractors. Therefore government spending policies can affect revenues.

The aerospace and defense industries are seeing growth due to a renewed focus on global security and technological advancements. These areas, while having stable demand, can be sensitive to governmental spending priorities and contracts.

The industrial markets that Moog operates within are influenced by several factors such as capital investment trends, the pace of product innovation, economic conditions, and industry regulations. While these markets have the potential to generate stable demand, they are often sensitive to economic and market changes.

Margins

Moog has maintained overall gross profit margin near 25% but adjusted earnings and operating margins are impacted by a range of costs, including high cost inflation and other supply chain issues. Their business is also affected by acquisitions.

Competitive Landscape

Moog’s competitive landscape varies across its segments.

  • In the Aerospace and Defense sectors, it faces competition from large, established players. Winning contracts requires a combination of technical expertise, pricing competitiveness, and strong client relationships.
  • In the Industrial market, Moog has a diversified array of competitors, some highly specialized and with focus on specific niches. Competition is primarily price-driven.

Moog differentiates itself by emphasizing its system integration expertise, custom engineering capabilities and strong customer relationships. This is especially evident in their position with the U.S. Government, where contracts are tied to a high level of quality and consistent high-performance.

What Makes Moog Different?

Moog’s position is differentiated by several factors:

  • Integration Expertise: They act as a systems integrator, allowing them to provide more holistic solutions compared to companies specializing in discrete components.
  • Strong Relationships: Having close collaborations with major customers like government agencies, and commercial and military aircraft manufacturers.
  • Technological Advancement: This is an area the management consistently stresses. They are constantly working to further innovate and improve their solutions.
  • Quality and Durability: They have a strong focus on developing and testing products to endure harsh and varied conditions. This is one of the main reasons that they have high customer loyalty.

Financials

Moog’s financials show a pattern of steady, if modest growth, in revenues and a focus on long term profitability.

Income Statement

  • Revenues were at $3,145.2 million for the fiscal year ended September 30, 2023, a 3.5% increase from the prior year.
  • Operating profit in 2023 was $236.9 million

  • Net earnings attributable to MOOG were at $133.4 million for the year, lower than $167 million in 2022.

  • For the last three months, operating profit was $60.5 million (6.1%), significantly lower than $106 million (10.9%) in the same period of 2022.

The decline in net profit was primarily due to the $64 million of restructuring charges. Without those charges, the company’s profit would be higher.

Balance Sheet

  • Total assets at September 30, 2023, were $3.81 billion.
  • Total liabilities and shareholders’ equity were also $3.81 billion.
  • The company held a substantial amount of cash and cash equivalents, totaling $64 million.
  • Goodwill and acquired intangible assets were at $929 million.

Cash Flow

  • Net cash provided by operating activities for fiscal year 2023 was $282.2 million.
  • Net cash used in investing activities was $165.8 million, which includes $173 million of capital expenditures and $28 million for an acquisition.
  • Net cash used in financing activities totaled $132.5 million for the year.

A strong positive operating cash flow indicates good operational efficiency for the company.

Moat Rating

Moat: 3 / 5 (Narrow)

Based on their strengths, Moog has a narrow moat due to a combination of its competitive advantages:

  • Technological Expertise and Innovation: Moog’s focus on high-performance precision systems gives them an edge. However, they continue to be sensitive to technological changes that could upend their advantage and product obsolescence.
  • Strong Customer Relationships: The company has built relationships with key players in both commercial and government sectors over many years, creating substantial switching costs.
  • Switching Costs in certain segments Their products are used in areas of operations that demand high quality and safety. They have a strong relationship in both parts and the maintenance aspect of their equipment sales, creating a strong moat in these business sectors.
  • Barriers to Entry: There are certain areas such as in their manufacturing, requiring strong regulatory approvals that offer a narrow form of a moat.

These factors are helpful but do not constitute a wide moat, as companies can attempt to compete with their innovative designs. Therefore, a narrow moat is most reasonable.

Risks to the Moat

While Moog has competitive advantages, the following risks can affect the moat:

  • Technological Disruption: Rapid technology advancements could render Moog’s products obsolete or less competitive.
  • Intense Competition: The aerospace and defense industries are quite competitive. Moog needs to continue innovating to stay relevant.
  • Government Spending: Since a good portion of revenue comes from government contracts, changes in government spending could be detrimental to Moog.
  • Long Sales Cycles: In markets like military, aerospace, and space, their sales cycles can be quite long. This can affect the company’s revenue visibility.
  • Supply Chain Issues: A globalized supply chain is subject to any kind of global risks. Political and economical uncertainties can disrupt the supply chain, which Moog faces, and can reduce the competitive advantage.
  • Inflation: Increase in operating costs and wages can impact the company, since they may be unable to pass on all cost increases to clients.

Business Resilience

Despite the risks, Moog displays significant resilience due to:

  • Long-Term Contracts: Long term contracts and multi-year agreements with key partners give some stability to their income.
  • Diversified Segments: Their revenues coming from different business segments and clients helps in revenue stability.
  • Reputation for High Performance: This is especially relevant in the Aerospace and Defense sectors. Quality of performance and reliability has given them a good relationship with their main clients.

Moog has a fairly complex business with its different business segments, government policies, and different industry characteristics.

Understandability

Understandability: 2 / 5 (Somewhat Complex)

While Moog’s fundamental business model is relatively clear — designing, manufacturing, and integrating high-performance controls — the nuances of its markets, its technical specialization, and the financial complexities of such a business make it challenging for the average investor to fully grasp its intrinsic workings.

Factors contributing to this rating:

  • Technical complexity: The specifics of Moog’s engineering, fluid controls, and specialized systems are very hard to understand.
  • Diverse segments: The wide variety of applications and industries that the company operates in complicates understanding.
  • Acquisition accounting: The company makes acquisitions, meaning their financial statements are not clean and simple.

Balance Sheet Health

Balance Sheet Health: 3 / 5 (Moderately Healthy)

Moog’s balance sheet is moderately healthy, but the company’s liability structure makes me give it a rating other than a full 5.

  • Debt Level: The company has $1.17 billion in long-term debt. While the debt levels are manageable and low compared to their assets, interest payment obligations represent a significant portion of their operating cash flow. The company did however pay down some debt in the year.
  • Financial Flexibility: Although the current assets can cover current liabilities, the company’s level of debt could constrain it from taking on new projects or opportunities.
  • Liquidity: Although cash and cash equivalents are good, a portion of it is used to maintain operations and cover liabilities. The amount isn’t so high, and this is an area they could improve upon.

The company has some debt but is mostly focused on improving shareholder value and reducing debt. This gives hope that they might improve their balance sheet position.

Recent Concerns

  • Increased Costs: Moog has been dealing with increased costs, especially in supply chain, logistics, and labor. These increase their total costs and therefore hurt profitability.
  • Impact of Acquisitions: While acquisitions can bring benefits, integrating the new businesses with the company’s current operations has led to increased expenses.
  • Lowered guidance: The company reduced its fiscal year 2024 guidance on earnings and sales on its recent earnings call. This shows management’s concern about future performance.
  • Restructuring Charges: The restructuring charges made in the most recent quarter show management acknowledging the need to do certain changes and also are a drag on net profit.

The major recent concerns of the company are declining revenues and the costs that have been hitting the company, and they are related to factors that are mostly outside of their control, and could cause further weakness for the coming year.

Management has indicated they are focused on growing revenue, improving profit, and optimizing cash flow. They are specifically focusing on increasing revenue and profitability from commercial aerospace to offset weakness in the defense sector. They are also trying to address inflationary and operational headwinds.

Conclusion

In conclusion, Moog is a complex business that offers a narrow moat for the long term with a focus on technological innovation and a strong established customer base. The company is in a good place, but recent earnings and the company’s liability structure brings its status to a level of just okay, and requires more vigilance and attention from management. The company could provide a solid return for the long-term value investor willing to take on more risk than usual.