(By Kevin Donovan) The first defense company to peek over the "fiscal cliff" prudently blinked, but the market apparently thinks all will be well. Despite slashing guidance for 2013, Rockwell Collins (COL) saw its shares rise nearly 1% Friday. Other defense companies posted gains as well, with the S&P 500 essentially flat. We take it as a sign investors think, at least for now, that automatic across-the-board government spending cuts can be avoided.
Rockwell Collins said the spending cuts slated to go into effect should Congress fail to act would take a significant chunk out of revenue and profit. It cut its guidance for 2013 earnings per share to a range of $4.30 to $4.50. Analysts had forecast on average $4.62 for next year.
At the closing price of $52.91, up $0.52 on the day, Rockwell Collins trades at a forward PE of 11.45 based on EPS expectations of $4.62 in 2013. Taking the $4.40 midpoint of Rockwell Collins' new guidance, the shares trade at a forward multiple of 12.03. The market is either putting a greater value on projected earnings after sequestration or isn't convinced it's going to happen. We think it's the latter and agree with that outlook.
With the prospect of share buybacks and a dividend yield north of 2%, we would be buyers on pullbacks should investors get skittish in the run-up to 2013.
Of course, the bets could go sour should the lame-duck Congress fail to address the scheduled end of the Bush-era tax cuts and the automatic spending cuts called for in the budget act legislated last year. Some $50 billion in defense spending could be cut in the first enforcement of sequestration according to reports.
For its part, Rockwell Collins CEO Clay Jones said it was "more than reasonable to assume sequestration impacts will occur and we have incorporated what we believe them to be in our fiscal year 2013 guidance."
"Despite this extraordinary headwind, Rockwell Collins should once again demonstrate its ability to maintain strong segment operating margins and, with the benefits of share repurchases, maintain earnings per share in the same range as fiscal year 2012," Jones said in a statement.
Beyond 2013, Rockwell Collins expects government programs moving from development into production, a healthy air transport OEM backlog, and the launches of new air transport and business aircraft should help results stay on course with long-term growth targets.
Rockwell Collins develops and deploys communication and aviation electronics equipment for both commercial and government sectors. Its applications include flight deck avionics, cabin electronics, mission communications, information management and simulation and training. The company has 20,000 employees in 27 countries.