​How Small-Cap Astronics Builds Growth on High-Margin Electronics

MoneyShow  |

The major players in aerospace/defense straddle more than one sector. The manufacture of war-making machines requires industrial might and the latest technology, notes John Persinos, editor of Investing Daily's Personal Finance.

Astronics (ATRO) is an electronics maker for commercial and Pentagon customers. With a market valuation of $1.1 billion, ATRO has the added mojo of being a small-cap player that thrives on cyclical growth.

Astronics makes lighting and safety systems, aircraft structures and other avionics products for aerospace and defense industries around the world. The company also provides automatic test systems for communications and weapons platforms, and aircraft training and simulation devices.

A hot segment within defense is ultra-sophisticated electronics gear, which is Astronics’ bread and butter. Not only are these products in great demand, but their complexity allows the company to charge a premium for them.

Astronics posted third-quarter profits roughly in line with Wall Street’s expectations. Revenue took a slight year-over-year dip, but robust guidance for 2018 has pushed the stock sharply higher. Astronics provides must-have electronics that aircraft suppliers can’t do without. That’s a nice niche to occupy.

The defense electronics business can be volatile. Investors should patiently wait out ATRO’s ups and downs and focus on the company’s real story, which is a pipeline chock full of advance orders for high-margin products.

These ATRO products include power units, antennasand semiconductor test equipment. The latter should get a lift from the overall prosperity of the chip-making industry.

Another boost for ATRO’s long-term growth is the firm’s announced $104 million acquisition of Telefonix PDT, which management expects to close by the end of 2017. Illinois-based Telefonix designs and manufactures advanced in-flight entertainment and connectivity equipment, a booming aviation specialty.

As a small-cap technology innovator, Astronics is a tempting target for acquisition by one of the cash-rich aerospace/defense giants. Astronics boasts a lean, profitable business with a rock-solid balance sheet—just the sort of qualities that would attract a corporate suitor.

Astronics sports a total debt-to-equity ratio (most recent quarter) of 46.87, low for its industry, and a healthy operating margin (trailing 12 months) of 10.01%. The average analyst expectation is that ATRO’s year-over-year earnings growth will come in at an impressive 42.50% next year. I’m raising the buy limit on ATRO to $45.

John Persinos is editor of Investing Daily’s Personal Finance.

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