65% Returns, With More Room to Run

Michael Robinson

Tuesday, July 18, 2023

In the massive U.S. defense and aerospace sectors, a $200 million buyout probably doesn't stop you in your tracks.

After all, these two sectors are worth a combined $870 billion. Moreover, there are dozens of companies in these sectors that bring in $200 million – and often more – in revenue in a single quarter!

It's the reason behind this buy-out that is so noteworthy. And it's the basis for today's investment opportunity...

Putting Engines to the Test

You see, the acquired company I’m referring to, Calspan, has extensive experience in something you might take for granted. The company focuses on testing advanced jet and hypersonic engines.

In that regard, it ranks as a high-potential backend play. It's an operating unit of a supply firm that plays an integral role in U.S. defense and aerospace sectors.

The supply firm I have in mind recently bought Calspan as part of its growth strategy – one that involves using bolt-on buyouts to enter new markets and add new products to its franchise, giving it literally hundreds of revenue streams.

I believe this relatively cheap merger will prove a boon to the buyer, a company I’ve followed for many years, and one that plays an outsized role in U.S. aviation safety.

The Dawn of Modern Aviation

Calspan started in the aviation and aerospace testing market in 1943, at the dawn of modern aviation. It was one of the leading firms that helped make the WWII U.S. air fleet as iconic and successful as it was.

Remember, none of those B-17s, B-29s, P-51s, or F-6s fighters would have changed the war without being thoroughly tested from prototype to buildout.

And Calspan was the company doing the work. Even today, Calspan has significant aerospace and testing contracts with major aircraft makers and the military.

The stakes are rather high in the defense sector and the flourishing commercial space-exploration market. The speeds, sophisticated equipment, and stresses are even more intense for these vehicles than, say, a jetliner.

Of course, the mainstream media never really talks about these "pick and shovel" companies. They'll talk about Lockheed Martin (LMT), Northrop Grumman (NOC), or Boeing (BA).

But each piece of equipment these companies buy to build their planes – down to the seat belts, gauges, cargo containers, switches, pumps, wiring, and scores of other parts – has to be hardened and pass stringent testing and certification.

This isn't a world where startups can pop in and steal market share with better software and a cooler interface. This is serious business, but one that is pretty much out of view from Wall Street and investors alike.

And no one has a better track record of accumulating the decisive but unknown leaders in these unsung areas like my current pick.

A "Three-Fer"

The company I'm referring to is a "three-fer," with significant subsidiaries in the automotive, aerospace, and defense industries.

All three sectors are going through huge transformations. And underpinning these advancements are the companies that make up my "offensive lineman" of a stock.

This holding company is one of the top producers of highly engineered aircraft components, systems, and subsystems for use on nearly all commercial and military aircraft in service today.

It has 49 operating units across the world and 114 manufacturing locations.

Its operations are decentralized, which enables each company to pivot when necessary, without getting bogged down in a monolithic corporate structure. They can remain nimble to the benefit of the larger company.

And its strategy of buying up "singles" instead of swinging for the fences on mergers means the businesses it buys are adding to the bottom line from the time of acquisition without major risk of dilution to shareholders.

The company's aftermarket business (the maintenance done on planes that are being serviced at airports, etc.) includes familiar names like American Airlines (AAL), United Airlines (UAL), as well as Delta (DAL) and Southwest (LUV).

But it also has far flung aftermarket business with Singapore Airlines, Emirates, Ryanair, and China Southern.

Its top platforms where its testing and equipment are for plane makers as well as aftermarket are the Airbus A320 as well as Boeing 737, 747, 757, 767, and 777.

In the defense sector, the company is a key contractor for both the F-16 and the next-gen F-35. It also works closely on Blackhawk helicopters and C130 heavy-lift cargo planes.

Each year, the company is finding excellent strategic acquisitions. Last year it bought DART Aerospace, a company that makes mission-critical equipment for helicopters.

The year before that it bought Cobham, a leading electronics company for the UK military.

During COVID, the company's progress slowed along with the global economy as people around the world began working from home and suspended travel. Military spending also fell.

But now air travel is rising quickly. A new electric vehicle ("EV") market is expanding quickly. And military tensions have reasserted themselves around the globe.

Old School Smarts

To illustrate the company's business savvy, in 2017, when automaker Takata was undergoing huge recalls for its airbags, my pick came in and bought Takata's seat belt division to add to its exposure in the automotive market. It also gave the company more production capacity for its airplane and aerospace safety harnesses.

This kind of "old-school smarts" is starting to be reflected in the uptick in this firm's stock price again. It's up nearly 28% year-to-date.

Earnings have been relatively sluggish in recent years in no small part because of the COVID slowdown.

But that's set to change this year because the company is expected to show per-share profit growth of 67%.

At just one-third of that rate, we'd see earnings double in roughly three years.

That's too much potential to pass up. And if you're a "Pro" subscriber, I'll share all the details with you about this opportunity.



>>>>>>>>>> Learn more <<<<<<<<<<

Cheers and Good Investing,

Chief Investment Officer
Trend Trader Daily

Tags: aviation military