Tuesday, July 28, 2009

Woodward Governor (NASDAQ:WGOV): Downgraded to Neutral at Baird; Goverment suspends MPC

Baird is out quite negative on Woodward Governor (NASDAQ:WGOV) downgrading the shares to Neutral from Outperform, no change to $23 price target. Firm believes suspension of MPC from participating in federal grants/programs creates a material revenue risk for WGOV and exacerbates already uncertain revenue visibility in company's aerospace, power generation, and infrastructure-related end markets. They remain constructive on long-term growth potential, but would look to high-teens to become buyers.

- MPC suspended from federal programs. As disclosed in WGOV's third quarter 10-Q, MPC (included in WGOV's Airframe Systems segment) received a notice of suspension from the U.S. Department of Defense stating that MPC has been temporarily suspended from participating in new federal procurements and grants, effective July 8.

- Recall that MPC derives approximately one-half of its near-$200MM revenue base from defense markets.

- Suspension applies only to MPC and not other WGOV businesses. MPC Products may continue to perform existing work under prime contracts in existence as of the date of the suspension.

- Sub-contractor work also limited. Certain government contractors must provide written notice before awarding MPC subcontracts exceeding $30K in value.

- DOJ investigation remains open. As previously disclosed, MPC is subject to a Department of Justice investigation regarding pricing practices prior to June 2005. The company is in the process of finalizing a settlement for this matter with $25MM accrued for settlement.

- WGOV does not believe MPC's suspension is related to any concerns of misconduct other than the aforementioned pricing practices issue.

Notablecalls: It looks like the 10-Q came out late last Friday and noone really paid any attention to the MPC suspension notice. Now Baird is out with a downgrade citing the suspension as the main cause. I think WGOV will get it (it's a mover stock). Only problem is how to get decent fills.

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