Curtiss-Wright Stock: Combining Defense, Nuclear Potential And Wise Capital Allocation (2024)

At Growth Arcane, we love sharing stories. Investing isn't just about numbers; it's about the narratives behind the companies in which we invest. In our view, it's especially satisfying to own companies that have shaped today's world and have the capacity to shape tomorrow's. We think Curtiss-Wright (NYSE:CW) is such a company. Though you might not know it today, CW has a rich history. The company has undergone significant changes, and holds in our opinion great potential for the future. In this article, we'll take you through CW's past, present, and future, and show you why we believe this company deserves more attention.

Company Presentation

CW is one of the most renowned companies in the aerospace industry. Created in 1929 by the merger of two companies, founded by 3 aviation's legends namely: Glenn Curtiss, the father of Naval aviation and the Wright Brothers who invented and had the first successful fly with a motored airplane. The company played a major role related to the production of armaments during the World War 2. It is mainly famous for the creation and manufacturing of the famous P-40 War Hawk.

To give you an idea of its critical role, during the WW2, CW produced more than 140 000 aircraft engines; 145 000 electric propellers and close to 30 000 airplanes.

Since the WW2, the company has changed dramatically and evolved. It had to. At the end of the WW2, the group was operating in a mature market and faced difficulties to change from propeller to jet aircraft. In this sense, the company completely reinvented itself through a long journey of innovations and strategic acquisitions.

Today, the company serves four segments:

- Aerospace, Ground & Naval Defense - Commercial Aerospace - Power & Process - General Industrial

Here's how the firm revenues are segmented per business:

You can have a more detailed look at the firm's revenue segmentation on the chart below:

Here's how the firm revenues are segmented per geography:

Here you can have a view on some of CW's important client:

Let's now detail CW segment offerings, and highlight what are their potential tailwinds and growth drivers, should there be any.

Aerospace Ground & Naval Defense - Robust Portfolio and Strategic Advantage in the Defense Sector

Within this segment, CW has a broad portfolio. The firm is particularly well positioned and has exposure for example to specific niches related to the management of liquids flows on nuclear-powered submarines, lift, flight and landing of aircraft, stabilization of weapon systems on aircraft and tanks.

The company has a robust relationship with its clients and is the preferred supplier of pump and valve for U.S. submarine and carrier propulsion systems. The group is also a key provider of software and sensors for U.S. planes and submarines.

CW also specializes in developing computing products and electronics tailored for highly specific network-related tasks. These products are also crucial and designed to meet stringent "No Fail" standards, essential for extreme fighting conditions and military operations. This sub-segment represents 30% of the Aerospace Ground and Naval Defense Segment.

We see significant growth potential in this niche, particularly as the defense industry becomes increasingly digitalized and reliant on advanced software and technology. We anticipate a mid double-digit growth on this segment supported by growing computing and tactical communication needs.

Here's a global illustration showing you how vast is CW's portfolio within its defense segment:

Finally, we see CW's substantial exposure to the defense market as particularly advantageous. The company is primarily focused on the U.S. which has the highest defense spending globally, exceeding the combined expenditures of the next ten largest countries. This spending tends to remain stable, providing in our view consistent visibility and predictability for the firm.

Note that according to the Congressional Budget Office:

The U.S. defense budget is projected to grow by 10% by 2038

In a world characterized by intensifying political tensions in the Middle East, in Eastern Europe but also in the China's seas with Taiwan, we have the conviction that CW and its diverse portfolio are set to benefit from the tense context that we believe, is set to last.

Commercial Aerospace - Expanding Horizons With some Clouds in Sight

CW is also present on the commercial aerospace segment. Here again, the firm has a broad portfolio producing a wide range of advance technologies in different segments related to Flight Operations and Safety Systems with Sensors, data recording products, Fire detection and suppression systems, Enhanced co*ckpit controls… , Mechanical systems and Surface Treatment like shot and laser peening, which improve fatigue life and form complex aerodynamic shapes for aircraft wings.

The group is working with top manufacturers like Boeing (BA) and Airbus (OTCPK:EADSF).

You can find the firm revenue segmentation by clients down here:

Within this segment, we expect a growth close to 3% as highlighted at the Aero Engines conference that took place in Miami the 24th February 2024 where it has been mentioned:

The global aircraft fleet is forecast to grow at a 3.3% compound annual growth rate from 2024-2033

In our view, this segment might be subject to several risks especially when considering the fact that BA represents 45% of the firm revenues within this segment. However, we do not believe that BA current situation will impact CW over the long term.

Power & Process - Nuclear Adoption Opportunity

In our opinion, the Power & Process segment is one of the most interesting and with the highest growth potential.

CW has an important position in the nuclear industry combined with a strong reputation. The firm has been involved in the construction of the first U.S. commercialized nuclear power plant. This power plant has been delivered in 1957 in the state of Pennsylvania.

CW offers a very broad range of advanced critical technology and services to the nuclear industry, focusing on enhancing safety, reliability, and efficiency in nuclear power plants.

On the safety side, CW provides sophisticated instrumentation and control systems essential for the safe operation of nuclear reactors, including reactor protection and cooling systems, control room instrumentation, and data acquisition systems. These solutions are critical as they help monitor critical plant parameters.

On the reliability side, CW offers advanced valve control solutions crucial for the precise control of fluid flow, combined with inspection and maintenance services.

Regarding efficiency, CW high-performance pumps ensure effective coolant circulation in both pressurized water reactors and boiling water reactors. Their engineering and consulting services provide support in the design, analysis, and licensing of nuclear plant systems and components, along with lifecycle management solutions from initial design to decommissioning.

Uniquely Positioned to Thrive

There is a key element that is underappreciated in our view and that must be considered. The group has a strong reputation thanks to its advanced reactor coolant pump. Why? Because they are designed for Westinghouse's AP1000 reactor. This capacity to fit this kind of reactor is in our view crucial. Close to 60% of power plants demand submitted in the US to the Nuclear Regulatory Commission ('NRC') have selected the AP1000 design.

That's why we see the exposure and the positioning of CW regarding this segment as particularly appealing and impressive.

The nuclear industry just like the Global Aerospace and Defense Industry is a very exclusive club characterized by high barriers to entry due to the immense number of norms implied by the risks it represents. In this sense, very few actors are aggregated by the Nuclear Regulatory Commission. CW is part of this very exclusive club.

Aside from its high barriers to entry, we see the nuclear industry as one of the most crucial especially in a context of increasing adoption of EV and AI that will drive energy demand.

We believe it will support the development of nuclear power plant while making the use of this source of energy more crucial than ever.

Specifically on AI, we base our assumption on a study made by Goldman Sachs where it is mentioned:

At present, data centers worldwide consume 1-2% of overall power, but this percentage will likely rise to 3-4% by the end of the decade. In the US and Europe, this increased demand will help drive the kind of electricity growth that hasn't been seen in a generation.

Combining Residential, Commercial, Industrial, Transportation and Other to the data center demand, we reach a CAGR of 2.4% for the upcoming decade.

For now; nuclear power only represents 10% of the world's electricity and almost 18% in OECD.

In our view, this is set to increase as the world is bracing for a more important nuclear energy adoption.

This is also the view of the IEA in a recent study we invite you to read where it is mentioned:

At the COP28 climate change conference that concluded in December 2023, more than 20 countries signed a joint declaration to triple nuclear power capacity by 2050.

You can also find below their 2025-2026 forecasts regarding nuclear power generation by region:

For all these reasons, we believe that CW's exposure to this promising segment represent a robust growth lever for the upcoming decade. In this sense, we expect a high single digit growth on this segment.

General Industrial - Cross Over Opportunities

This segment is particularly interesting as it highlights CW capacity to adapt its core technologies for new and diverse sectors and applications. We will come back on this aspect later. Within this segment, CW is producing and selling advanced surface technologies and position sensors to significantly enhance the performance of vehicles ranging from racing cars to heavy trucks.

An interesting anecdote for you to shine in society, according to CW:

In the 2023 season alone, our sensors powered 18 out of 20 cars on the grid

The firm is also exposed to medical sector where it is producing parylene coatings providing essential properties such as lubricity and biocompatibility to devices like stents and catheters.

We expect this segment to grow at low single digit given the lack of strong catalysts.

Unique Capital Allocation Strategy and Cross Over Strategy

CW stands out from its peers from the defense industry due to its well-established and proven strategy.

First, the firm capitalizes on the markets it currently operates in. Through effective cost management and profitability optimization, the firm leverages its strong capital allocation, which is nearly evenly split between operational investments, acquisitions, and returns to shareholders.

Next, the firm targets new and adjacent markets, aiming to disrupt them through innovation, collaboration, or M&A. Although M&A can be risky, we see it as particularly appealing for a company with such a successful track record. We expect this strong expertise in M&A to continue to support the firm growth.

Upon entering a new market, CW leverages its expertise to implement its crossover strategy. This strategy aims to apply technologies discovered in the defense sector to the commercial segment and vice versa. This unique approach accelerates growth and synergies while further disrupting new markets, setting CW apart from its peers and making it a diversified and growing company, not just a defense contractor.

A Defense Company That Is Defensive!

We believe CW's strong partnership with the U.S. government, which accounts for 46% of its revenues, positions it as an exceptionally well-managed and defensive company. This relationship provides a stable and predictable revenue stream, essential for weathering economic downturns. Additionally, CW operates in key segments critical to national security, making the U.S. government heavily reliant on its services. This dependence grants CW significant pricing power, allowing it to negotiate favorable terms and maintain profitability. Operating in segments with high barriers to entry further solidifies this reliance on CW's products in our opinion. Going forward, we expect the U.S. to continue to represent a strong part of CW revenues.

With diversified exposure, a proven track record, a strong partnership with the U.S. government, a low Beta of 0.8, and a consistently growing dividend, we see CW as a particularly defensive investment.

Financials and Valuation

We decided to compare CW to peers belonging to the defense industry as this segment represent, the majority of the firm's revenue.

Debt Analysis

CW's debt profile is solid. The firm boasts the best liquidity profile in its peer group, with the highest current ratio. It also has the best long-term debt ratios, the lowest Total Debt/Total EBITDA and Net Debt/EBITDA ratios. We consider that this strong position provides CW with the flexibility to borrow for financing projects related to M&A or R&D if necessary.

Profitability Analysis

On the profitability side, CW stands out as the most appealing player. The company has the best margins in its peer group, and its 14.2% Free Cash Flow margin is 50% higher than that of its peers. This high FCF margin highlights CW's ability to convert revenue into cash, reflecting strong financial health and operational efficiency. We expect this substantial cash generation to support M&A, R&D, and shareholder return policies in the future. It should also allow the firm to maintain a defensive approach, providing a cushion against economic downturns and unexpected expenses.

Valuation

In our valuation model, we expect CW to grow its top line by mid-single digits over the next five years. We anticipate high single-digit revenue growth in the Power & Process segment, high to mid-single-digit growth in the Aerospace Ground & Naval Defense segment, and low single-digit growth in the General Industrial and Commercial Aerospace segment. Despite operating in industries with high capital intensities, we expect CW to stabilize its costs thanks to a digitalization of its processes supported by a consolidation of legacy software used within the organization. Our assumptions lead us to project a 7.5% annual FCF growth over the next five years. With a 3% perpetual growth rate and an 8.5% WACC, we reach a target price of $339, representing a 21.2% upside.

Risks

Despite CW's impressive strengths and potential, we recommend you to consider several risks.

First, CW operates in industries where mistakes are unacceptable. Its high-end institutional clients are looking for impeccable workmanship and performance. Any decline in quality could lead to a reputational crisis, which would be catastrophic for the company.

CW's exposure to the commercial aerospace sector, which is highly cyclical and sensitive to economic fluctuations, poses a risk. With Boeing accounting for 45% of CW's revenues in this segment, any financial or operational difficulties faced by Boeing could significantly impact CW's performance.

While CW's partnership with the U.S. government is in our view advantageous, it also presents a risk. Any changes in defense budget allocations or procurement policies could materially affect CW's financial performance.

Finally, despite CW's proven track record in M&A, this strategy carries risks related to the successful integration of acquired companies.

Conclusion

In our view, CW is a particularly compelling company. We believe the firm's strong history, diverse portfolio, strategic operational enhancements, robust financial health, and innovation across its four primary segments make it a compelling investment opportunity.

CW's engagement in high-visibility sectors like defense, alongside fast-growing areas such as nuclear energy, offers a unique advantage. This is strengthened by strong relationships with major clients, including the U.S. department of defense and Boeing. We particularly like the firm's exceptional profitability and liquidity profile and we believe that it sets it apart from its peers by ensuring strong free cash flow for M&A, R&D, and consistent dividends.

The company's ability to adapt core technologies to new applications, along with its proven track record, makes it, in our opinion, a resilient and essential stock to consider for a diversified portfolio.

We initiate coverage of CW with a buy rating and a target price of $339, representing a 21.20% upside.

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