Woodward Inc: Our updated thoughts on spare LRUs

Research evidence excerpt

Woodward Inc: Our updated thoughts on spare LRUs

Forecast returns

Forecast price appreciation 23.1%

Forecast dividend yield 0.3%

Forecast stock return 23.4%

Market return assumption 9.3%

Forecast excess return 14.1%

Company Description

Woodward manufactures fluid, combustion, electrical and motion control solutions for the

aerospace and industrial markets. In aerospace, the company is diversified across large and

small commercial and military aircraft, as well as guided munitions and other defense

applications. In industrial, Woodward principally sells into the power generation,

transportation and oil & gas industries.

Valuation Method and Risk Statement

Our 12-month price target is based on 27.0X 5-8Q EV/EBITDA.

Risks

Aerospace macro: If the air travel and airplane demand environment weaken, it would impact

the demand for WWD aftermarket and OE parts. This would likely also negatively impact the

multiple, depending on the duration of weakness in the end-market. We believe expectations

for continued aftermarket growth are currently elevated, and a slowdown relative to

expectations could negatively impact sentiment (even with continued underlying growth).

Supply chain disruption: The supply chain continues to be unpredictable both for Woodward

and its customers, with factors outside of the company's control. This could further disrupt

both sales and margins, and result in working capital build pressuring free cash flow.

Industrial margin pressure: The Industrial margin has historically been lumpy, even prior to

supply chain and labor disruptions. This is partially due to limited visibility in certain sub-

markets. This revenue volatility and other factors such as cost inflation could pressure margins

relative to our assumption margins trend higher over time.