Manufacturing stock Héroux-Devtek designs, develops, manufactures and repairs landing gear and actuation systems and components for the aerospace market.
Montreal-based Desjardins Capital Markets analyst Benoit Poirier says he is impressed with manufacturing stock Héroux-Devtek Inc.’s (TSX—HRX) prospects after touring the new facility it acquired from the Spanish aeronautical systems company CESA.
“The recent acquisition provides additional capabilities and new programs, as well as a strong foothold in the actuation market, which is 2.5 times larger than the landing gear market,” Mr. Poirier says. He recommends investors ‘buy’ the aircraft parts and equipment manufacturer and sets a $23 target share price.
“HRX is well-positioned and just scratching the surface (of the actuation market). Management estimates the total addressable market (including hydraulic) at US$7.7 billion. We currently estimate CESA’s exposure to actuation at $36 million only, which is small versus the total market.”
He comments further: “We are confident in management’s ability to replicate the strategy which was deployed with landing gear and grow its presence in actuation.”
CESA’s sales per employee are high
The largest segment inside the actuation market is primary flight controls and high lift (55 per cent of total) while secondary flight controls and landing gears, as well as engine and utility represent 21 per cent and 24 per cent of the total, respectively.
Founded in 1999 after the Spanish government entered the Eurofighter Typhoon program, CESA now has 327 employees located in two facilities in Spain (Madrid and Seville, with a total of 415,000 square feet) and customers in 11 countries.
CESA has been investing about 15 per cent of annual sales in technology and product development. About 70 per cent of CESA’s revenue is derived from defence (30 per cent from commercial), and the ratio of sales per employee is extremely high (at about $370,000 per employee) despite the higher percentage of work that is sub-contracted.
Four acquisitions over the past year
The last year has been busy for HRX, with four acquisitions under its belt (CESA, Beaver Aerospace & Defense Inc., Tekalia Aeronautik Inc. and Alta Precision Inc.) and being awarded the following contracts: the F/A-18, the Advanced F-15, and the Boeing MQ-25 Stingray program. Those opportunities should continue to fuel revenue growth, says the analyst.
“HRX remains among our preferred names due to its impressive growth prospects (organically and through cross-selling opportunities), potential for margin improvement (driven by the in-sourcing of the latest surface treatment and integration of recent acquisitions), improved balance sheet and attractive valuation,” Mr. Poirier concludes.
This is an edited version of an article that was originally published for subscribers in the August 9, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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