Source: Moog.
The aerospace industry has supported countless companies in recent years, and Moog (MOG.A 2.30%) (MOG.B -1.23%) has reaped its fair share of profits from the boom in aircraft demand. Yet the maker of motion-control components for use in everything from airplanes and spacecraft to dental training equipment has found itself at the mercy of prevailing conditions in the overall industrial business cycle. In its fiscal first-quarter report Friday morning, Moog's financial performance fell short of what longtime shareholders had expected from the company. Let's take a closer look at the challenges that Moog faced last quarter and what they mean for its longer-term prospects.
Moog falls back to earth
Moog's fiscal first-quarter results were mixed, but they didn't live up to investor expectations. On the earnings front, net income climbed 10% from year-ago levels, and a reduction in share counts lifted earnings per share by an even greater 23% to $0.86. Yet that was still a penny shy of consensus forecasts among analysts, and Moog's 2% drop in revenue to $631 million reflected the weakness throughout Moog's core business areas.
Indeed, none of Moog's major segments managed to produce substantial sales growth during the quarter. The key aircraft segment reported gains of less than half a percent in revenue, with a 10% rise in sales related to commercial aircraft production proving inadequate to lift prospects for the entire division. Military aircraft sales were responsible for the sluggishness throughout the segment, with original-equipment manufacturing revenue plunging 14% as Moog cited weakness from the F-35 fighter and other key fighter-aircraft programs. In the space and defense segment, revenue picked up by 0.5%, as falling demand for satellite avionics held back the space-market business even though defense sales rose 6% for the period.
Source: Moog.
Meanwhile, several of Moog's divisions posted substantial pullbacks. Worst was the industrial systems business, which saw revenue fall 7% due largely to double-digit declines in simulation and test systems sales. The energy sector also played a key role in holding the segment back, with a 10% drop in energy-product revenue hitting Moog hard. Sales in Moog's components group fell 3%, as did revenue from the medical devices segment.
Will 2015 hurt Moog more?
CEO John Scannell had mixed thoughts about Moog's prospects, boasting that the company surpassed its initial earnings forecast. Yet Scannell pointed to "the impact of three macroeconomic headwinds: the strengthening of the U.S. dollar, the industrial malaise outside the U.S., and the sharp and sustained drop in the price of oil" as introducing new uncertainty to Moog's prospects.
As a result, Moog revised its guidance for the full 2015 fiscal year downward. Cutting revenue projections by $95 million, the company now expects revenue of $2.57 billion, which will equate to $3.85 per share in earnings, not including the impact of any future share repurchases. With investors having expected earnings of more than $4.20 per share for the year, Moog's news came as somewhat of a shock, despite the obvious impact of changing economic conditions.
Source: Moog.
Still, in the long run, Moog remains well positioned to benefit from long-term growth in its key businesses. In particular, commercial aircraft demand shows few signs of slowing, and some believe that flagging military budgets could finally hit bottom and stop weighing down sales for the companies that rely directly and indirectly on defense contracts as part of their business. What Moog's results this quarter show is that the company is vulnerable to weakness in other areas of the industrial economy -- and if anything happens to slow the pace of growth in aerospace, that's when investors should truly take a close look at Moog's prospects for the future.
