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In spite of exceeding earnings expectations and receiving positive rating upgrades from sell-side analysts, Curtiss-Wright (CW) has experienced a downward trend in its stock price, plummeting by 8% since reaching a peak of $178.41 in April 2023. Surprisingly, the stock has remained stagnant year-to-date, failing to regain its lost ground. The primary catalyst behind this decline can be attributed to the prevailing uncertainty surrounding the debt ceiling, mounting fears of an impending recession, and expensive valuation.
 

Financial Statement Analysis

Curtiss-Wright (CW) has demonstrated impressive growth in the past two quarters, with a mid-teen increase attributed to significant improvements in supply chain operations within the defense sector and a surge in demand within the commercial aerospace industry. This positive trend continued into the first quarter of 2023 when the company achieved a notable 13% year-on-year growth in sales. The conversion of backlog orders and enhanced stability in the supply chain were key factors contributing to this success. Additionally, CW's strategic acquisition of Arresting Systems in June 2022 played a crucial role in boosting overall sales growth.

Furthermore, CW's commitment to commercial and operational excellence, combined with enhanced supply chain management, resulted in a commendable improvement in adjusted operating margins. Year-over-year, the company's adjusted operating margins increased by 20 basis points to reach an impressive 12.9% in Q1 FY23.

The strong demand observed in the defense electronics and commercial aerospace markets has led to a surge in new orders for CW over the past few quarters. With a book-to-bill ratio of 1.1x in the first quarter and a robust backlog of $2.7 billion, CW enjoys a healthy order backlog, providing excellent visibility for sales growth throughout 2023. Moreover, the company is strategically positioned to benefit from the multiyear growth in the defense markets, driven by the notable increase in the U.S. defense budget. The president's FY24 DoD budget request of $842 billion, reflecting a 3% increase over FY23, bodes well for CW's prospects. In addition, CW stands to benefit from increased funding under the AUKUS joint submarine program, which involves supplying five Virginia-Class submarines to Australia. This program is expected to drive sustained revenue growth for CW well into the next decade.

Recognizing the growing trend toward commercial vehicle electrification, CW has also made significant strides in this area. The company secured a substantial contract with a leading truck OEM to provide power management and electronics to support safe and efficient electric vehicle performance.

Overall, Curtiss-Wright's recent successes across various sectors, strong order backlog, and strategic positioning in key markets indicate a promising outlook for sustained growth and profitability in the coming years. 

Looking at Curtiss-Wright’s balance sheet, it becomes evident that the company boasts an exceptional financial standing. With an equity-to-asset ratio of 0.47, the company demonstrates a strong foundation, indicating that a significant portion of its assets is funded by shareholders' equity. Additionally, the company maintains a debt-to-equity ratio of 0.66, further reinforcing its robust financial position. This ratio signifies a healthy balance between debt and equity financing, implying that the company has prudently managed its debt levels.

Furthermore, Curtiss-Wright's impressive return on common equity of 16.09% outshines many of its industry peers. This metric highlights the company's ability to generate substantial returns for its shareholders based on the equity invested. The above-average return signifies effective capital allocation, efficient operational management, and successful execution of strategic initiatives.
 

Valuation

As we assess Curtiss-Wright's valuation, it becomes apparent that the stock is currently trading at a slightly higher price relative to its sales. With a forward enterprise-value-to-sales ratio of 2.83 and a forward price-sales ratio of 2.39, the stock appears to be priced at a premium. Comparing these ratios to the median values within the industrial sector, we observe a positive difference, indicating that Curtiss-Wright is relatively more expensive when compared to its industry peers.

Furthermore, when examining the stock's forward price-to-earnings (P/E) ratio, we find it to be 18.55x, surpassing the sector median of 16.48x. This indicates that investors are currently paying a higher multiple of the company's expected earnings for each dollar invested compared to the sector average.
 

Conclusion

After evaluating both qualitative and quantitative factors, including the latest earnings report, I have developed a cautious outlook on Curtiss-Wright's stock. While the company exhibits robust growth prospects, I am skeptical about its ability to sustain its ongoing bullish trend. The primary reason behind this apprehension stems from the stock's high valuation. Considering the company's current valuation metrics, which indicate a relatively higher price compared to its peers, I am inclined to adopt a pessimistic stance on the stock at this time.

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