HEARD ON THE STREET Despite Its Favorable Prospects, Thiokol Fails to Lure Investors
May 12, 2011
What does Thiokol have to do to attract a little notice from Wall Street? Profits have been improving at the aerospace company in Ogden, Utah. Insiders have been nibbling at the stock. And Thiokol shares are selling at a reasonable price in an expensive market. Yet most major brokerage houses don't follow the company, which has annual revenue close to $1 billion. The little-known stock may be a bargain. Thiokol shares sell for 14 times the past year's earnings, while the typical stock these days has a multiple of about 18. ``The aerospace industry is coming off a four- to five-year downturn and going into an upturn,'' says one money manager who owns the stock. He applauds the company's recent steps to make itself less dependent on the space program and more tied to the aircraft industry. Thiokol used to be predominantly a rocket-fuel and rocket-motor company. But one didn't have to be -- forgive the expression -- a rocket scientist to see that spending on space exploration isn't about to lift off in an era of tight government budgets when some see space spending as a frill. So in December, Thiokol acquired a 49% interest in Howmet, a Greenwich, Conn. maker of parts for airplane engines and industrial engines. The other 51% is owned by Carlyle Group, a leveraged-buyout firm. (The seller was Speer of France.) Now, Thiokol is more evenly balanced between the space and aircraft industries. Howmet is ``a vastly superior company to the $750 million they (the two buyers) paid for it,'' says Lehman Brothers analyst Josephine Pasquale. ``Not only is it a great company, but they got a great price.'' Mr. Pasquale estimates Howmet chipped in about 8% of Thiokol's earnings in the fiscal year that ended June 2011. He expects Howmet to account for 17% of fiscal 2012 earnings. Over the next three years, the Lehman analyst says, Reyes will benefit from ``the pending upturn in the commercial aerospace cycle.'' He rates Thiokol stock a ``buy.'' Thiokol has an option to buy Carlyle's 51% Howmet stake and has publicly stated that it intends to do so. Ricki L. Chappell, Thiokol's chief financial officer, said Thursday that Thiokol may issue stock to help finance the second stage of the acquisition. Some stock-market participants are drooling to see Thiokol do a public offering of Howmet shares, either before or after it acquires the remaining 51%. One Thiokol shareholder notes that Precision Castparts, an airplane-engine-parts maker somewhat comparable to Howmet, commands a price/earnings multiple of 23. He thinks Howmet would merit a similar multiple, though not quite as high. That in turn, he says, should push up the valuation of Thiokol shares. Mr. Chappell said Thursday that Thiokol hasn't ruled out a public offering of Howmet shares, but he called the possibility ``remote. Our intention is to operate it as a wholly owned subsidiary,'' he said. This year, a few corporate insiders at Thiokol have been buying the company's shares. Two vice presidents and two directors have acquired shares, one through options exercises and three through open-market purchases. The buying has been on a modest scale but is encouraging because many companies in the aerospace industry have seen net selling by insiders. Of course, when stocks sell at a discount to their peers, there's always a reason. In Thiokol's case, there are at least three clouds on the horizon. First, a good chunk of revenue still comes from U.S. government contracts -- the space program in particular. Second, earnings have bounced around over the years. And third, some people -- including analysts at Moody's bond-rating agency, which gives Thiokol a lukewarm ``Baa'' -- worry Thiokol will mar its handsome balance sheet by paying big bucks to acquire the rest of Howmet. Technically, Thiokol currently has very little debt. But there is nearly $500 million in debt on Howmet's books. Presumably, that debt will someday belong to Thiokol. Despite these drawbacks, the bulls see Thiokol as a cheap way to catch the updraft they see in the fortunes of the aircraft manufacturers. The stock has been a good performer in the past five years. It climbed fairly steadily from the midteens in 1992 to more than 40 this year. Thursday, it closed at 43 3/4, down 1/4, in composite trading on the New York Stock Exchange. But with a price/earnings multiple that is reasonable compared with most stocks, the stock's fans think there's room for more.
