Aerospace stalwart Rockwell Collins (NYSE:COL) ended last week -- and last fiscal year -- on a low note. Reporting its financial results for fiscal year 2015, which just ended on Friday, the maker of airplane communications and aviation systems failed to meet analyst expectations for either sales or profits and saw its stock soon swoon in response.
After three straight quarters of posting earnings beats, Rockwell Collins finally stumbled on Friday. According to its press release, fiscal Q4 2015:
- Quarterly sales flatlined at $1.4 billion, down just slightly from last year's Q4.
- Operating margins improved by 70 basis points, rising to 22%.
- Combined with a slimmer share count, this helped Rockwell Collins to boost earnings per share 12% ($1.38 per diluted share) despite the sales slowdown. Unfortunately for Rockwell, analysts had been expecting $1.41 per share.
Crunching the numbers
Full-year fiscal 2015 numbers looked both better and worse than the Q4 results. For the year as a whole, Rockwell Collins grew its sales 5% to $5.24 billion. Operating margins were a bit slimmer over the course of the whole year, rising 30 basis points year over year, but ending at just 21.1%. Combined with the share buybacks and revenue growth, however, that was enough to lift net profits by 16%, to $5.13 per share.
Additionally, Rockwell saw strong, 13% growth in operating cash flow, producing $749 million in cash profit. Despite rising capital expenditures, this left the company with $539 million in free cash flow, a modest 8% increase year over year. Disappointingly, this was still far less cash profit than the company's $686 million in reported net income would suggest.
Valued on those GAAP earnings, Rockwell Collins shares now sell for an earnings multiple of just under 17. Valued on free cash flow, however, the stock costs 21.6 times FCF -- significantly more expensive. What's more, although full-year growth was robust in 2015, analysts cited on S&P Capital IQ generally agree that growth will slow in the years ahead, with Rockwell Collins averaging just 10% annualized profits growth over the next five years. So whether you prefer to value the stock on GAAP earnings or on actual free cash flow, either way, the stock's looking pretty expensive right now.
Nor is there much chance of it looking less expensive in the year ahead.
Offering guidance for fiscal 2016, which has just begun, Rockwell Collins told investors to expect roughly $5.30 per share in profits on revenues of between $5.3 billion and $5.4 billion. This implies a forward P/E multiple of 16.6 -- and year-over-year profits growth of just 3%, which is quite a bit slower than we saw in 2015. Free cash flow at the company, meanwhile, could range anywhere between $500 million and $600 million -- $550 million at the midpoint. This implies even weaker growth in cash profits, of just 2% versus 2015.
Long story short, there's a good reason Rockwell Collins stock sank last week. Unless this company outperforms expectations significantly in the year ahead, 2016 could be a rocky year for Rockwell Collins shareholders.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on our virtual stockpicking service Motley Fool CAPS, where he posts his favorite (and least favorite) stocks under the handle TMFDitty -- and where he's currently ranked No. 299 out of more than 75,000 rated members.
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