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ESTERLINE TECHNOLOGIES

the stock in November 2005. It's 42% higher, vs. a 19% gain for the S&P 500 index. The company isn't nearly earning up to its potential, though. With the right push from management the stock could easily produce another few years of outperformance.

In that last write-up I described Esterline as a consolidator of "tier 3" suppliers to the aerospace industry. That description still fits, but it's becoming incomplete. Break a plane down into subsystems, and then reduce the subsystems to components, and then further divide the components into parts. Those are tier 3 items. Esterline has snapped up 30 parts makers in the past decade. Increasingly, though, the company is able to sell entire subsystems to plane makers. For example, Boeing's long-awaited 787 jumbo jet will feature overhead cockpit panels made by Esterline. Previously the company might have sold the switches, dials and relays separately.

That's a promising development. Such systems sell for well more than the sum of their parts, so Esterline has been able to extract more sales from many plane programs, thereby growing faster than the industry. Also, aerospace companies increasingly prefer to act as designers and final assemblers, outsourcing system and component manufacturing to as short a list as possible of other companies. Esterline has more than 20 independently branded business lines and makes parts for 175 different programs, including all Boeing jets, Lockheed Martin's Joint Strike Fighter and Sikorsky's Blackhawk attack helicopter. The diversification suggests the company is well positioned to cash in on anticipated strong growth in plane orders over the next few years and the ongoing shift toward parts outsourcing.

Diversification both helps and hurts the company. No single aerospace program makes up more than 3% of sales, so there's little risk of losing a big contract. Also, Esterline's business is fairly balanced between commercial aircraft (46% of sales), military programs (36%) and industrial and medical customers, many of which have found use for items originally designed for planes. So if America's military spending ever plunges to what some of us would consider more rational levels, the company will be dented but not sunk.

But then there are the margins. Esterline has focused more on lumping companies together than on cutting overhead out of them, and so it turns only around a dime of each dollar of sales into operating profit, vs. 15 cents for peers. Jefferies analyst Howard Rubel notes that Esterline employees generate just $15,000 apiece in earnings before interest and tax. Compare that with a trio of aerospace suppliers this column has recommended in the past: L-3 Communications at $25,000, BE Aerospace at $67,000 and Precision Castparts at $82,000.

Despite the skimpy margins, or perhaps because of them, Rubel initiated coverage of the stock with a Buy recommendation in February. (Note that Jefferies was sole manager of a follow-on stock offering for Esterline in October.) He figures that if the bosses shift their strategy from aggressively buying other companies to things like unifying its purchasing among its business divisions and sharing operating services, and that if the company can make up only half the margin deficit to peers, it would add 85 cents a share to earnings. For an example of what such a shift can do for an aerospace supplier, consider what is has done for L-3. I recommended the stock in June 2003 at $42. Today it goes for $110.

Esterline's profits are forecast to jump 33% this year to $3.51 a share. That puts the stock at 16 times earnings. Next year analysts are looking for just 8% earnings growth, but that figure could prove conservative. Over the past four quarters Esterline has beaten estimates by an average of 26%.

The company turned up recently along with seven other names on a search for accelerating sales growth. Have a look at the full list of search criteria if you like and run the screen anytime using SmartMoney's stock screener.

Also See:

• Flying Under the Radar

• War Lines Pockets of Defense-Stock Investors

• Bigger Planes, Travel Boom Benefit BE Aerospace

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Data as of May 6, 2008.

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Accelerating Sales Growth Screen Recipe

• Flying Under the Radar

• War Lines Pockets of Defense-Stock Investors

• Bigger Planes, Travel Boom Benefit BE Aerospace