The industrial economy has been generally sluggish, and Moog (NYSE: MOG-A) (NYSE: MOG-B) has been exposed to adverse trends because it sells its components to industrial customers. Coming into Friday's fiscal fourth-quarter financial report, Moog investors were expecting minimal growth in both earnings and sales, so the company's actual results surprised them in both directions. Let's take a closer look at what Moog said and how its future looks.
Moog makes components for key military systems. Image source: Moog.
Moog sees sales slump, earnings climb
Moog's fiscal fourth-quarter results were mixed. Revenue slid 1%, to $619 million, which was worse than the modest gain that most investors had expected to see. However, net income jumped 17%, to $33.1 million, and that produced earnings of $0.92 per share, well in excess of the $0.80 per-share consensus forecast among those following the stock.
Looking more closely at the numbers, Moog suffered a reversal from what investors have seen for quite awhile. The aircraft controls segment has tended to benefit from the strength in the aerospace industry, but its sales actually fell almost 4% from the year-ago period. The components division also saw a slight 1% decline, but industrial systems experienced growth in excess of 2%. Space and defense controls led the way with a gain of close to 5%.
On the bottom line, things moved in nearly the opposite direction. Aircraft controls saw a better than 10% rise in operating profit despite the sales decline, and components segment profit jumped almost 40%. Industrial systems saw its bottom line soar by two-thirds. Only the space and defense controls segment saw its operating profit decline, falling by more than half.
Moog gave good details explaining the performance. For aircraft controls, the military side of the business suffered even as commercial aircraft sales climbed. Satellite propulsion system sales powered the space segment higher, while higher energy industry sales offset lower industrial automation sales in the industrial systems segment. Yet components suffered from weakness related to energy, showing the crosscurrents that Moog has to navigate in driving its business forward.
CEO John Scannell put Moog's performance in perspective. "Like many companies, we're faced with a slow-growth environment," Scannell said, "and we responded with restructuring activities, ongoing portfolio adjustments, and continued investment for the long term." Moreover, the CEO thinks that Moog did well operationally despite the industry challenges, and he's confident in the company's long-term success.
What's next for Moog?
Yet Moog is also being fairly conservative in its outlook for fiscal 2017. As Scannell explained, "We're assuming most markets will be fairly stable, with the only real growth coming from the A350 program." The company is also preparing for a negative shift in program mix within both the military and commercial areas of the aerospace sector, and higher taxes will hold back the company.
As a result, Moog's guidance wasn't as strong as most investors were hoping to see. For the full year, Moog expects sales to rise just 1%, to $2.44 billion, which compares unfavorably with the consensus forecast for nearly $2.5 billion. Similarly, earnings guidance for roughly $3.50 per share is well below the $3.80 per share that most investors expect, even when you incorporate the implicit range of plus or minus $0.20 per share in the company's forecast.
It's likely because of that somewhat downbeat guidance that Moog stock reacted negatively to the news, falling 2% in the day's session following the announcement. Nevertheless, for long-term investors, the more important question is whether the company can overcome cyclical pressures and keep making progress in its strategic efforts. If it can, then Moog should see its fundamental strength rise over time, even if it oscillates upward and downward in response to business cycles.
