A Flight Path for Profits

Pilots can’t plan for everything, especially weather. That’s why commercial operators of all types are looking for weather radar with fully automatic worldwide hazard detection.

The commercial aviation industry this year is emerging from its deep slump, boosting demand for all types of avionics, especially weather hazard detection radar. This trend will lift the fortunes of avionics maker Rockwell Collins (NYSE: COL).

Rockwell Collins pioneered solid-state weather radar technology for commercial aviation. Because of weak economic growth in the US and the recession in Europe, the company’s stock is undervalued now, even though demand for its avionics—weather hazard detection equipment, in particular—is positioned to take-off.

The aerospace consulting firm G2 Solutions, based in Kirkland, Washington, projects a huge boom in business for avionics as the airline industry recovers from its past woes.

G2 Solutions forecasts a cumulative commercial avionics market worth $105 billion, from 2012 to 2020. About three-quarters of the global avionics market is controlled by Rockwell Collins and Honeywell International (NYSE: HON).

Rockwell Collins, the industry leader, will benefit from the fact that it provides the avionics for Boeing’s 787 Dreamliner, a “game changing” aircraft now entering service. Honeywell, meanwhile, remains vulnerable to the decline in service of Boeing’s current 737 line.

The Danger of Turbulence


Avionics innovations are coming to the fore that make flying more predictable. New features in the cockpit are improving safety, by significantly reducing pilot workload and enhancing weather-detection capability. Pilots are seeking more accurate hazard avoidance systems, enabling them to detect a wide variety of weather phenomena that occur around the globe and allowing flight crews to more precisely plan—in real time—long range tracks that circumvent significant weather.

Rockwell Collins’ new hazard detection products, such as those on the 787, automatically adjust weather detection parameters for variations precipitated by time of day, time of year and geographic position. These products then use advanced radar threshold technologies to calibrate the radar returns to more accurately display actual thunderstorm threats.

An overriding goal in weather hazard avionics is to spot well in advance the danger of turbulence, the irregular and sometimes violent motion of air currents that can severely buffet crew and passengers. Turbulence often is linked with thunderstorms, but predictive models of turbulence are difficult to create and cockpit displays often are plagued by false returns from ground-based clutter.

Rockwell Collins’ weather hazard detection avionics incorporates five leading-edge technologies, all of which transcend today’s most advanced radar systems because they add predictive weather analysis and hazard detection features. These technologies include: Directed Sequential Hazard Assessment; Flight Path Hazard Analysis; Storm Top Information; Predictive Overflight Protection; and Enhanced Turbulence Detection.

According to the Federal Aviation Administration’s Aviation Weather Office, bad weather accounts for 70 percent of flight delays and 21 percent of accidents. Moreover, up to two-thirds of weather-related delays are potentially avoidable. Weather remains a huge problem for the National Airspace System, spurring research efforts by numerous government agencies, academia and industry.

Problem is, the technological approach has been fragmented in the past, which is why Rockwell Collins adopted avionics technologies that combine the latest weather hazard detection advancements into a cohesive package in the cockpit.

Indeed, the real weather challenge isn’t a lack of technological wherewithal—it’s how to practically integrate already proven technologies that are available today to create a common situational awareness. Passenger and crew safety and comfort are of critical importance to airlines. That’s why, as avionics technology becomes increasingly sophisticated, commercial operators of all types are looking for Rockwell Collins’ weather radar with fully automatic worldwide hazard detection.

Weathering the Economic Storm


Rockwell Collins’ business is split between the military sector (60 percent) and commercial (40 percent). Survival in the airline industry requires financial leverage and technological focus, and Rockwell Collins possesses both. Since it was founded 73 years ago, the company has been synonymous with the latest advances in avionics.

Today, the company’s dedicated Advanced Technology Center pioneers new avionics technologies through strategic partnerships with academic, government, and industrial collaborators. Rockwell Coillins invests roughly 19 percent of sales into research and development, an impressive percentage.

Rockwell Collins is plugged into the future of the air transport market, not just with the Boeing 787 but also with the 787’s main rival, the Airbus A350 XWB (extra-wide body). Both planes are popular and they rely on Rockwell Collins’ avionics in the cockpit. For the next 15 to 20 years, Rockwell Collins will reap the fruits of winning those two programs.

These advantages already are showing up on the bottom line. The company recently reported strong third-quarter fiscal 2012 earnings of $166 million, an increase of 6 percent from $157 million in the same period last year.

The company generated third-quarter earnings per share (EPS) of $1.14, an increase of $0.13 or 13 percent, from EPS of $1.01 in the same quarter a year ago. The company reported third-quarter revenue of $1.21 billion, an increase of 1 percent from sales of $1.19 billion in the same year-ago quarter.

Despite the modest sales increase, EPS increased by double digits—twice the rate of earnings growth—due to the increased level of share repurchases that reduced share count by 7 percent this year. In addition, the company hiked its dividend in the third quarter by 25 percent, for a dividend yield of 2.4 percent.

Considering the extreme depth and breadth of the aviation sector’s recent slump, Rockwell Collins more than weathered the storm. With a price-to-earnings (P/E) ratio of only 11.39, the stock is being unduly punished by investors wary of global economic uncertainty.

The stock rates a great buy now, before the rest of the investing herd catches on to the imminent explosion in avionics demand. The stock’s also cheap in relation to its peer group of industrial goods, which commands a P/E of 13.85, and to the S&P 500’s P/E of 17.7.

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