Esterline Technologies Corporation (ESL): Insiders Are Buying This Defense Stock, But Should You?

Earnings looking ahead

On Feb. 2, the company reported net income of $25.1 million and sales of $458.0 million. One year ago, first-quarter net income was $22.8 million, and sales were $470.9 million.

Esterline Technologies Corporation (NYSE:ESL) also reported a gross margin of 35%, up 1.4% from the same period last year. The most spectacular improvement came in the cash flow arena: cash flow from operations in the quarter was $86.5 million, almost doubling last year’s $46.6 million figure. New orders for the first quarter ($473 million) were also up from last year’s $467.8 million. EPS for the quarter also grew to $0.81 per share, up from last year’s $0.74 per share.

Despite the growth in earnings, the stock price is almost identical to that of one year ago. The key is if earnings growth can continue this year, amid the significant defense spending cuts. However, the company seems well-poised to sail through the defense cuts relatively unharmed due to its diversification strategy; by focusing on a balanced global approach between defense markets and commercial aerospace, Esterline should keep revenue and earning numbers solid. In fact, only 25% of the company’s revenue comes from US defense spending. So, while the defense cuts might impact its earnings (especially during the first half of the year), a strong commercial aerospace cycle, coupled with the growth opportunities in the company’s adjacent markets (casino gambling installations, China high speed rail, nuclear power initiatives in the UK) could keep earnings growing at healthy rates this year.

Defense-related stocks have been out of favor as fears of drastic defense cuts spooked investors. Esterline Technologies Corporation (NYSE:ESL), however, seems to have a solid balanced model that not only seeks to protect the company’s earnings from cyclicality, but also seeks to grow in additional markets. However, the stock is not drastically undervalued, and is in better shape than some of its competitors, so bargain-hunters or bottom-fishers might want to look elsewhere. As a solid aerospace play, however, the stock looks attractive. The recent insider buying helps support this assertion.

The article Insiders Are Buying This Defense Stock, But Should You? originally appeared on Fool.com and is written by Alex Bastardas.

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