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2 Ways to Grow at Woodward Governor

Sometimes the planets align themselves perfectly. For Woodward Governor (Nasdaq: WGOV  ) , which makes parts for aircraft engines and power generators, the harmonic convergence of strong global demand for both air travel and energy has produced a nice surge.

In the aircraft business, both the civilian and the military segments are expanding for the first time in years. According to industry consultant Teal Group, this will probably continue for the next 10 years. Aerospace companies will make more than 44,000 aircraft worth a combined $1.3 trillion over the next decade, about 40% more than last decade. Likewise, in the power generation business, there appears to be no end to growth in sight, with China, India, and others setting the pace.  

As a supplier both to the aerospace and the power-generation industries, Woodward has an impressive customer list. It serves both members of the airliner duopoly, Boeing (NYSE: BA  ) and Airbus, as well as the leader in regional jets, Embraer (NYSE: ERJ  ) . In power generation, Woodward sells to leaders like Cummins (NYSE: CMI  ) .

Woodward isn't the only one riding these waves. Both General Electric (NYSE: GE  ) and the Pratt & Whitney unit of United Technologies (NYSE: UTX  ) make engines for jets and turbines for generators. But as a small-cap company, Woodward depends on these two segments even more. That's fine -- as long as those waves keep surging.

And they certainly have so far in 2007. Last week, the company said overall sales rose 25% to $291 million in the fourth quarter, and net income more than doubled to $36 million from $17.1 million. For the fiscal year, sales rose 22%, and net income rose 40% to $98.2 million. Earnings per share jumped to $2.79 from $1.99 a year ago.

The largest segment, turbine systems, pumped up earnings by 29% for the year, though it stumbled a bit in the last quarter. The other big segment, engine systems, boosted earnings by 40% for the year.  

Woodward strikes me as the kind of small-cap growth play that deserves a much closer look. In addition to its strong competitive position, it's followed by only a few analysts. It's a bit pricey now, even given the expected growth rate, but it's worth keeping an eye on in case one of those surging waves calms down.

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