Although its military division has seen declining sales, Héroux-Devtek’s can expect the rising commercial aviation market to keep its shares flying.
Shares of airplane landing-gear maker Héroux-Devtek Inc. are poised to take off alongside growth in the commercial aviation market and despite a drop in military spending, analysts say.
Investors in the Longueuil, Que.-based company, the world's third-largest landing-gear company for commercial and military aircraft, have seen their shares increase by about 8 per cent over the past year – with some turbulence along the way.
Analysts say long-term contracts with aviation giant Boeing Co., and the recent acquisition of a British landing-gear company, will help boost the small-cap stock.
"The biggest reason why I like it is the visibility the company has into its long-term growth," said National Bank Financial analyst Cameron Doerksen, who has an "outperform" rating on the stock (similar to "buy") and a $14 target.
Among five analysts that cover the company, four have a "buy" or equivalent rating, while one says, "hold," according to Bloomberg. The consensus price target over the next year is $14.30, which is about 40 per cent above where the stock is now trading at around $10.
Scotia Capital analyst Anthony Zicha has a "buy" and $15.50 target on Héroux-Devtek, citing its strong industry position, an improving commercial aerospace industry and sees "a possible buyout of the company down the runway."
The stock hit a 52-week high of $12.35 in late May, after the company beat expectations for its fourth quarter ended March 31, and said it would invest $90-million in capital improvements to support its Boeing work, which analysts say demonstrates the size of the contract.
The company said in December it signed the largest landing-gear contract in its history, supplying systems for Boeing's 777 and 777X aircrafts. In August, it announced another deal to produce components for Boeing's 787 Dreamliner.
In February, the company closed the acquisition of Britain-based APPH Ltd. and U.S.-based APPH Wichita Inc., which broadens its geographical reach into Europe.
The company has a goal to nearly double sales to $500-million within the next five years. Its sales were $272-million at the end of fiscal 2014, including $14.7-million from the APPH acquisition.
Desjardins Securities analyst Benoît Poirier, who has a "buy" on the stock and $15 target, said in a note the APPH acquisition should "further add to shareholder value."
The stock has hit a few bumps over the past year though, including in early November, when it fell to a 52-week low of $8.59 after reporting a "marked decline" in sales of military products.
The company's military division, which accounts for about half of its revenues, mostly in the U.S., has suffered due to government cutbacks.
"Conditions in the military aerospace market are expected to remain difficult, as governments address their deficits," the company said in its most recent outlook.
However, it says the commercial market is strengthening, citing an International Air Transport Association forecast for 5.9-per-cent growth in the passenger market in 2014 and a 3.1-per-cent rise in air cargo volume.
Raymond James analyst Ben Cherniavsky has an "outperform" and $14.50 target, citing in a note "the general strength of the global commercial aerospace market."
Risks for investors include another economic downturn that could curb spending across the sector, analysts say.
TD Securities analyst Tim James has a "hold" on the stock and lowered his target to $12.50 from $13 in August after the company reported lower-than-expected earnings of 12 cents per share in the first quarter, compared with expectations of 14 cents.
"Although Q1 earnings were below our forecast, we do not consider the results to be representative of a material change in the long-term potential value in Héroux-Devtek," Mr. James said in a note. "We believe that the company is very well-managed with many excellent organic growth opportunities."