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Defense spending will be cut by about $500 billion if Congress fails to weasel out of the automatic budget cuts stemming from the failed supercommittee. Investors are wary to touch anything related to defense because of this seemingly endless budget crisis, but that might mean it's a great time to buy. Buy what, though? Let's take a look at an aerospace and defense company I believe will keep flying no matter how often Congress fails: Astronics (Nasdaq: ATRO ) .
Diversification means protection
Astronics makes aircraft lighting, in-seat power systems that run your laptop and in-flight entertainment, and test and training systems, among a variety of other products. Of all Astronics' sales in 2010, only 15% were to the U.S. government, and that was not even its largest customer. That was Panasonic Avionics, owned by Panasonic (NYSE: PC ) , with 26.5% of sales. This means about 60% of revenue comes from other customers than its top two. That's not bad for an industry that is traditionally reliable on big contracts from a few companies. Just as diversifying your portfolio can protect you from dips in certain sectors, Astronics' diverse set of customers helps protect its revenues if it loses a customer.
And man, Astronics needs protection from this industry
In 2008, customer Eclipse Aviation went bankrupt and left $1 million in unpaid bills and $7.4 million in unusable related inventory. But because this was one small customer out of several, Astronics still posted a 2008 net income of $8.4 million and had enough cash the following year to acquire DME Corp. (which further diversified Astronics into test and training systems).
Now, American Airlines parent AMR (NYSE: AMR ) just filed for bankruptcy. The commercial air market makes up 56% of Astronics' sales, and with most major American airlines going bankrupt in the past decade, this isn't the most stable industry. American Airlines has a pending order of 42 Boeing (NYSE: BA ) 787 Dreamliners, and Astronics supplies parts for the Dreamliner. How badly does this affect Astronics?
Not as much as you'd think. Boeing still has orders for 819 Dreamliners, and oddly enough, the AMR bankruptcy may even increase the odds that the company's Dreamliner order goes through. This again demonstrates the importance of a diverse set of customers but highlights the potential dangers of doing business with the bankrupt-prone airline industry.
A view from 30,000 feet
Looking to the future, one healthy sign is the large amount of backlog, or future orders. In the latest quarterly release, Astronics listed more than $101 million in backlog, compared to $91 million at the end of 2010. Along with Boeing's 787 Dreamliner, Astronics supplies parts for the new F-35 Joint Strike Fighter and the new business Learjet 85. Each of these planes will require parts in the future, good news for long-term revenue. And only the F-35 is subject to the government's whims -- whims like delaying production of more than 100 planes and potentially scrapping one of the three planned versions.
General Dynamics (NYSE: GD ) , which relies on Uncle Sam for 72% of its revenue, has caught the eye of Berkshire Hathaway. But if that play is too risky for you, see if Astronics might make your portfolio take off. Even in the seemingly down-and-out airline industry, I'm comfortable enough with Astronics' fundamentals to give it a thumbs-up CAPScall.
But if you have as much faith in aerospace as in a congressional supercommittee and still want a piece of the government-related action, then check out our free report, "Too Small to Fail: 2 Small Caps the Government Won't Let Go Broke."