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Collins' Stock Dives, Profits Sky-High


Report suggest shareholder worries may be overblown.

Rockwell Collins (COL), producer of aviation electronics, released third-quarter earnings substantially better than Wall Street's expectations: Net income went from $146 million to $174 million and earnings per share (EPS) went from $0.86 to $1.07. Analysts had anticipated earnings of $1.02 per share.

But even as Rockwell spread the good word -- including an increase in full-year EPS guidance from $3.95 to $4.05 to $4.05-$4.10 -- Wall Street reacted as if they'd heard the sky was falling: Its stock lost more than 8% of its value on Friday, when third-quarter results were released.

What gives?

Rising fuel prices, along with the fact that airlines may suffer capacity reductions of as much as 30%, have some analysts worried about the company's long-term future. Rockwell CEO Clayton M. Jones said he expects capacity reductions of no more than 5% globally and 10% in the U.S.

Looking ahead to 2009, Jones said that "robust commercial OEM delivery schedules and a steady increase in defense spending will more than offset the broadly anticipated reductions in airline capacity…We expect that 2009 will be another year of continued earnings growth for our company."

Management's willingness to paint an optimistic picture speaks volumes, as does its decision to increase full-year earnings projections, particularly in this environment.

This suggests to me that Wall Street's worries may be a bit exaggerated, and that the stock is oversold: Third-quarter numbers indicate that some of Rockwell's key margins are expanding, which will provide a buffer in the event of a downturn.

In fact, operating earnings from its Commercial Systems division accounted for 23.7% of the division's sales, as compared to 21.8% in the comparable period last year - a jump of almost 200 basis points. At the same time, operating earnings from its Government Systems division accounted for 21.6% of the division's total sales - a jump of more than 200 basis points from 2007.

If analysts remain concerned about Rockwell's future, they have a funny way of showing it: Over the last 90 days, the average estimate for the year ending in September 2009 has increased from $4.47 to $4.49 per share - 10% more than the $4.05 management prediction. Hardly pessimistic.

On Friday Rockwell Collins closed at $47.16, down $4.30 or 8.36%.

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No positions in stocks mentioned.

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