Rohr Flies High With Big Orders : But Stock Weighted By Sinking Earnings
The commercial aircraft business is flying high these days and so is Rohr Industries Inc., the Chula Vista manufacturer of aircraft engine nacelles, or casings, found on virtually all commercial airline models.
Rohr’s backlog reached a record $1.5 billion on Dec. 1, up from $1.3 billion just a month previous and $1.1 billion on July 31, an increase due in large part to higher demand for planes built by Boeing, McDonnell Douglas and Airbus. Rohr’s revenue for the quarter ended Nov. 1 was $202 million, a 28% increase from the like quarter last year.
Aerospace industry analysts expect Rohr’s growth trajectory to continue climbing in fiscal 1988. In fact, Dave Smith of Alex. Brown & Sons Inc., investment bankers based in Baltimore, said Rohr revenue may reach $240 million for the quarter ending Jan. 31, which would be more than 50% better than sales over the same three months a year ago.
Rohr’s profits, however, have not kept pace. Rohr’s net income for the quarter ended Nov. 1 of $7.2 million was 20% less than last year’s. Fiscal 1987 profits of $26.9 million were also disappointing, dropping precipitously from $47.3 million in fiscal 1987.
Stock Undervalued
The low profits, which Rohr officials blame on the high cost of research and development and of tooling up for the recent increase in orders, are a big reason why Rohr’s stock is priced relatively low, despite its revenue growth.
Rohr stock closed at $16.875 Monday, giving the company a market capitalization of $320 million, less than one-fourth of the company’s current backlog. Monday’s stock price is also nearly $3 below Rohr’s current book value of $19.75 per share, Smith said.
“Rohr is tremendously undervalued,” Smith said. “People aren’t recognizing the value associated with the build-up of backlog.”
Rohr executives decline to address the profitability issue specifically except to say, in the words of spokesman Dick Dalton, that it “hopes to see benefits as soon as possible” from the high capital investment it has made over the last two years.
The big dollars Rohr has invested in itself is best illustrated by simple, standard numbers such as growth in employees and plant space. Rohr employees now total 10,700, up from 8,500 this time a year ago. Plant space has been expanded over 12 months by 800,000 square feet to a total of 5.4 million square feet, a 17% increase.
Most of the plant increase came by virtue of the company’s purchase in October of Fairchild Industries’ composite-bonding plant in Hagerstown, Md., a 442,000-square-foot facility. At the Hagerstown plant and at other locations, Rohr is advancing the art of making jet engine casings, not from metal but from “composites,” or fiberglass-like materials that make engines lighter and quieter.
Of the 2,200 new Rohr employees, more than 1,700 have been added at Rohr’s principal plant in Chula Vista, bringing total payroll there to 6,000 employees. The balance of Rohr’s employees are at the company’s Riverside plant with 3,500 employees and at Rohr plants in Arkansas, Alabama and France.
Upswing in Orders
What is driving the growth in production capacity at Rohr and at other commercial aerospace manufacturers is the huge upturn in the order cycle for commercial aircraft. U.S. commercial aircraft orders industrywide, which typically precede deliveries by about three years, will exceed 600 aircraft in 1987, the third year in the last four that orders have exceeded the 600 plateau, Rohr Vice Chairman Don Sim told shareholders earlier this month.
The order rate also indicates that the current delivery rate of commercial airliners, which Smith of Alex Brown expects to reach 440 in 1988, will be increasing dramatically over the next three years. And deliveries mean revenue for companies such as Rohr.
Analysts attribute the recent increase in airplane orders in part to cyclical market factors. The industry was due for a spurt in orders to replace a generation of aging aircraft, said John Simon, senior vice president at Seidler Amdec Securities of Los Angeles.
But Simon emphasized that the current cycle is also being pushed by technology, including the more fuel-efficient and quieter engines available on the new generation of aircraft, including the Boeing 757, the Airbus Industries A320 and the McDonnell Douglas MD-80. Rohr makes nacelles for each of the three lines of aircraft.
Lighter Components
Much of that increased fuel efficiency occurs because the new generation of aircraft contain many components, including the engine nacelles supplied by Rohr, made of composites. The plastic-like materials typically weigh 25% less than the same parts built with metal, thereby reducing airlines’ fuel costs, said John Burton, Rohr’s director of advanced technology applications.
The new nacelles made by Rohr also reduce engine noise, an increasingly important consideration to airlines now faced with several federally mandated deadlines for airplane noise to be brought below minimum levels. The airlines can either reduce engine noise by buying one of the new families of airplanes or by retrofitting their engines.
In addition to being a supplier of new nacelles, Rohr is also a member of the Valsan Re-engining Inc. venture with Pratt & Whitney.
