ESCO Technologies provides filtration, fluid control products, and integrated propulsion systems for the aviation, navy, space, and industrial markets. It also specializes in radio frequency [RF] shielding, electromagnetic compatibility [EMC] test products, and diagnostic tools for the electric utilities and renewable energy markets.
ESE’s past financial results have demonstrated robust top-line growth. Additionally, profitability margins have been consistently expanding. In 2Q24, it continues to report revenue growth driven by its Aerospace and Defense and Utility Solutions Group segments.
Looking ahead, the recovery in aerospace and positive aircraft delivery outlook is anticipated to bolster ESE’s growth outlook. Additionally, the increase in global electricity consumption is also expected to support ESE’s growth. Given ESE’s positive outlook, the company is well-positioned for future growth.
Historical Financial Analysis
ESE’s financial results have demonstrated robust top-line growth over the past few years. In 2021, it reported total net sales of approximately $715.40 million. In 2022, net sales grew 19.9% year-over-year to $857.5 million, driven by all three segments: Aerospace and Defense [A&D], Utility Solutions Group [USG], and RF Test & Measurement [Test].
The A&D segment’s net sales increased 11.6%, driven by an increase in commercial aerospace sales as a result of the COVID-19 pandemic’s recovery. The USG segment increased 37.2%, driven primarily by the acquisitions of Altanova and Phenix and increased sales from Doble and NRG.
Lastly, the Test segment was up 15.2% year-over-year, driven by increased demand for medical and industrial shielding and power filters.
In 2023, net sales increased 11.5% year-over-year to $956.0 million. This growth was driven primarily by its USG and A&D segments, partially offset by weakness in the Test segment. Additionally, the acquisition of CMT contributed approximately $10 million in net sales.
The A&D segment increased 11.7% year-over-year, attributed to the recovery from the COVID-19 pandemic. The USG segment was up 23.0%, driven by increased shipments of condition monitoring and protection testing products and higher NRG net sales due to increased shipments of wind energy assessment towers and sensors and solar products. The Test segment was down 2.8%, mainly due to COVID-19 disruptions in China.
Regarding profitability margins, both EBIT margin and net earnings margin have been consistently expanding over the last three years. In 2023, A&D’s EBIT increased 4.7% due to higher volumes. USG’s EBIT increased 33.2% year-over-year, driven by increased volume in Doble and NRG.
The Test segment’s EBIT declined by 0.6% due to COVID disruptions in China. On a consolidated basis, the 2023 EBIT margin expanded from 13% to 13.40%. Additionally, the net earnings margin increased from 9.60% to 9.68%.
Second Quarter 2024 Earnings Analysis
For 2Q24, ESE’s sales grew 8.7% year-over-year to $249.1 million, driven by its Aerospace and Defense and Utility Solutions Group segments. The A&D segment’s net sales increased 15.9% year-over-year to $114.7 million, attributed to an increase in commercial aerospace and defense aerospace shipments and Navy revenue.
The USG segment’s net sales increased 10.2% year-over-year to $87.3 million, driven primarily by an increase in service revenue, cybersecurity and compliance revenue, and NRG’s net sales.
However, the Test segment net sales fell $3.9 million, or 7.6% year-over-year, to $47.1 million due to lower wireless, filters, and acoustic volumes, which negatively impacted its US and European operations. The Test segment’s Asian operations partially offset the decline.
On a consolidated basis, ESE’s EBIT margin expanded from 11.18% to 13.03%. The A&D segment’s EBIT margin increased from 19% to 20.4%, driven by leverage on higher volumes and increased pricing. USG’s EBIT margin expanded from 17.8% to 20.2%, driven by leverage on higher volumes and pricing increases.
The Test segment’s EBIT margin fell from 14.2% to 11.7%, driven by lower sales volumes in its US and European operations.
As a result of EBIT margin expansion, ESE’s 2Q24 net earnings margin expanded from 7.80% to 9.32%. EPS increased from $0.69 to $0.90, a year-over-year increase of 30.4%. For the quarter, ESE’s entered orders fell 5% to $239.1 million due to aerospace strength being offset by weak test orders. The 2Q24 book-to-bill ratio is 0.96, while its backlog increased 8% year-over-year.
Recovery in Aerospace
ESE’s A&D segment offers highly engineered products and services to the industrial, aerospace, navy, and space sectors. According to Accenture, it is forecast that in 2024, global commercial aerospace revenue will surpass 2019 levels. For 2024, global commercial aerospace revenue is forecast to grow approximately 11% year-over-year, driven by airlines’ need for more efficient aircraft, supply chain improvements, and increasing demand for maintenance, repair, and overhaul [MRO].
Aircraft delivery is also expected to increase, with Boeing and Airbus combined forecast to deliver approximately 1,400 aircraft in 2024.
The total number of aircraft is expected to reach approximately 46,560 by 2042, with the demand for new passenger and freighter aircraft around 40,850. This positive outlook for the aerospace industry is expected to bolster ESE’s growth.
Increasing Power Consumption
Global electricity consumption is anticipated to increase from now to 2050. By 2050, global electricity consumption is forecast to more than double from the current level of approximately 25,000 terawatt-hours [TWh] to between 52,000 and 71,000 TWh. The main driver behind the increase is the electrification of economies and the growing energy needs of emerging economies.
China’s power demand is forecast to reach approximately 16.8 TWh, North and Central America’s demand around 10.5 TWh, and India’s approximately 6.9 TWh. Combined, these three regions’ power demand in 2050 will account for over half of the global power demand. The forecasted growth in global power demand is expected to bolster ESE’s outlook.
Relative Valuation Model
Based on ESE’s most recent 2023 10K, the company lists its competitors. ESE’s forward revenue growth rate is 8.59%, slightly outperforming its peers’ median of 8.12%. However, in terms of profitability margins TTM, ESE slightly underperformed. ESE’s EBITDA margin TTM is 19.35%, below the peers’ median of 20.52%. The net income margin TTM is 9.94% vs. peers’ median of 11.25%.
Currently, ESE’s forward non-GAAP P/E ratio is 24.26x, slightly below the peers’ median of 25.21x. Given ESE’s underperformance against its peers in terms of margins, it is fair for ESE to trade below its peers’ median P/E.
Risks and Conclusion
ESE’s dependence on sales to the US government poses a risk. These sales, mainly in its A&D segment, have accounted for about 26% of total revenues over the last three fiscal years and are reliant on government funding, which may be negatively impacted by prolonged government shutdowns and the inability to obtain timely and sufficient appropriations.
Over the last three years, ESE has shown strong top-line growth and expanded profit margins. The favorable outlook for the aerospace industry and the forecasted growth in global power demand are expected to bolster ESE’s growth. Given these positive trends, ESE is well-positioned for future growth.
DISCLAIMER
You should read and understand this disclaimer in its entirety before joining or viewing the website or email/blog list of SmallCapStocks.com (the “Publisher”). The information (collectively the “Advertisement”) disseminated by email, text or other method by the Publisher including this publication is a paid commercial advertisement and should not be relied upon for making an investment decision or any other purpose. The Publisher is engaged in the business of marketing and advertising the securities of publicly traded companies in exchange for compensation. The track record, gains, upside, and/or losses mentioned in the Advertisement, if any, should not be considered as true or accurate or be the basis for an investment. The Publisher does not verify the accuracy or completeness of any information included in the Advertisement. While the Publisher does not charge for the SMS service, standard carrier message and data rates may apply. To unsubscribe from receiving promotional text messages to your phone sent via an autodialer, using your phone reply to the sender’s phone number with the word STOP or HELP for help.
The Advertisement is not a solicitation or recommendation to buy securities of the advertised company. An offer to buy or sell securities can be made only by a disclosure document that complies with applicable securities laws and only in the states or other jurisdictions in which the security is eligible for sale. The Advertisement is not a disclosure document. The Advertisement is only a favorable snapshot of unverified information about the advertised company. An investor considering purchasing the securities, should always do so only with the assistance of his legal, tax and investment advisors. Investors should review with his or her investment advisor, tax advisor or attorney, if and to the extent available, any information concerning a potential investment at the web sites of the U.S. Securities and Exchange Commission (the "SEC") at www.sec.gov; the Financial Industry Regulatory Authority (the "FINRA") at www.FINRA.org, and relevant State Securities Administrator website and the OTC Markets website at www.otcmarkets.com. The Publisher cautions investors to read the SEC advisory to investors concerning Internet Stock Fraud at www.sec.gov/consumer/cyberfr.htm, as well as related information published by the FINRA on how to invest carefully. Investors are responsible for verifying all information in the Advertisement. As an advertiser, we do not verify any information we publish. The Advertisement should not be considered true or complete.
The Publisher does not offer investment advice or analysis, and the Publisher further urges you to consult your own independent tax, business, financial and investment advisors concerning any investment you make in securities particularly those quoted on the OTC Markets. Investing in securities is highly speculative and carries an extremely high degree of risk. You could lose your entire investment if you invest in any company mentioned in the Advertisement. You acknowledge that we are not an investment advisory service, a broker-dealer or an investment adviser and we are not qualified to act as such. You acknowledge that you will consult with your own independent, tax, financial and/or legal advisers regarding any decisions as to any company mentioned here. We have not determined if the Advertisement is accurate, correct or truthful. The Advertisement is compiled from publicly available information, which include, but are not limited to, no cost online research, magazines, newspapers, reports filed with the SEC or information furnished by way of press releases. Because all information relied upon by us in preparing an advertisement about an issuer comes from a public source, it is not reliable, and you should not assume it is accurate or complete.
By your subscription to our profiles, the viewing of this profile and/or use of our website, you have agreed and acknowledged the terms of our full disclaimer and privacy policy which can be viewed at the following link: www.SmallCapStocks.com/Disclaimer and www.SmallCapStocks.com/Privacy-Policy
By accepting the Advertisement, you agree and acknowledge that any hyperlinks to the website of (1) a client company, (2) the party issuing or preparing the information for the company, or (3) other information contained in the Advertisement is provided only for your reference and convenience. The advertiser is not responsible for the accuracy or reliability of these external sites, nor is it responsible for the content, opinions, products or other materials on external sites or information sources. If you use, act upon or make decisions in reliance on information contained in any disseminated report/release or any hyperlink, you do so at your own risk and agree to hold us, our officers, directors, shareholders, affiliates and agents harmless. You acknowledge that you are not relying on the Publisher, and we are not liable for, any actions taken by you based on any information contained in any disseminated email or hyperlink.
I’m Marcus Reynolds, a versatile writer known for connecting the dots between various news topics. My writing offers clear and thought-provoking insights into current events worldwide. I strive to keep you informed and engaged, making the ever-evolving world of news easier to navigate and understand.
