The Scientific and Technical Instrument Industry is a large collection of equities that deal with new research and design experiments to better other industries. While a risky business, market leaders such as Danaher and Thermo Fisher Scientific were able to collect $10.0 billion and $5.4 billion respectively in revenue last year. Along with these large-cap companies, smaller, but just as profitable corporations such as Moog Inc (MOG-A) are also strong foundations able to provide investors with long term capital gains. These gains are possible from the $1.86 billion company's excellent industry strategy and current undervalued status.

However, before trying to understand the fundamental components of Moog, it is vital to examine the industry strategy. According to Reuters, Moog "is a designer and manufacturer of precision motion and fluid controls, and control systems for a range of applications in aerospace, defense, industrial and medical device markets." With such a wide range of business, the company splits its business into five different components: Aircraft Controls, Space and Defense Controls, Industrial Controls, Components and Medical Devices. More specifically, its largest component, Aircraft Controls, deals with "control commercial transports, supersonic fighters, multi-role military aircraft, business jets and rotorcraft."

Some of these areas include high-tech aircraft including the Boeing 787 Dreamliner and the Airbus A400M. Along with such important air-business practices, Moog also has revenue coming from its production of valves for the National Missile Defense in its Space and Defense Controls region, "hydraulic and electric" systems related to turbines in its Industrial Controls segment and "electronic ambulatory infusion" for delivery of fluids to the body in its Medical Devices component. From this information, Moog has a vast diversification of industries in its overall business. It's true that it may not find high margins every quarter, but because of the breadth of business, Moog should never find itself with high decreasing margins as well. In fact, looking at a five-year chart of Moog's share price, the company has not seen a negative calendar year during this time, with a near 25% capital gain in 2006. Therefore, while Moog will not see a dramatic rise in its price at any one time, it will also rarely see any great drop. Instead, investors should routinely see a positive-linear correlation regarding share price, regardless if the investment is for the long or short term.

Nevertheless, many investors may say that other competitors in this industry have similar business strategies and will see similar share price appreciation. However, the key difference between those companies and Moog is fundamentals. According to Capital IQ, over the past twelve months, Moog has seen revenue reach about $1.42 billion. Year-over-year, the growth is nearly 20%, which is great for most companies. In addition, during this same time, Moog has posted gross margins, according to Reuters, at 33.24% and operating margins at 9.40%. At first glance, these numbers seem solid, however, as some investors will realize, these numbers are slightly below not only the industry average at 47.90% and 12.22% respectively, but below many of its industry competitors as well. Varian, a $1.7 billion stock, saw the respective numbers last year at 45.68% and 10.06%. Bio-Rad Laboratories, a $2.05 billion stock, had similar high respective numbers of 55.62% and 10.68%. Another $2.24 industry competitor, Illumina, saw is gross margins at 66.98%. With such a sizeable distance of figures from Moog to the aforementioned companies, there may be some new hesitation investing in this company. However, before reaching that conclusion, there are some other factors to take into consideration.

First it is important to realize that Moog, when compared to these other three competitors has the highest revenue over the past twelve months. In fact only Bio-Rad reached the billion dollar plateau with a total of $1.29 billion during this duration. That means that it will be difficult for a company to produce revenue and cut costs 50% or better every year when its revenue is already four times larger than some of its competing companies. What is important to realize is that Moog has seen increasing margin growth from its five-year average of 31.57% (gross) and 8.59% (operating). This excellent characteristic cannot be said of some of the aforementioned companies or even the industry as a whole—a consortium which saw negative margin differences during the respective time. Both rivals Bio-Rad and Illumina saw similar margin drops respective to the five year averages, where Illumina actually posted an operating margin of -113.36% compared to its five-year average of -16.62%. Therefore, while the actual margin number for Moog is not very high, using the context of the industry and other competitors, Moog is doing quite well.

In fact, to make this company seem even more enticing, when looking at the trailing twelve month sales and EPS growth rate compared to the five-year average, there is strong growth in this area as well. Once again, while the numbers are not as high as the industry or some of the aforementioned companies, the important statistic to look at is if these margins are growing. Sales over the past year at 20.02% is significantly higher than the five year average at 13.15%, and EPS over the past year at 17.88% is also higher than the five year average at 16.05%. What's more impressive is that capital spending, as a five-year growth rate is at 25.39%. This is significant compared to the industry average at 7.33% or averages from competitors such as Varian (-5.98%) and Bio-Rad (4.16%). This is a great advantage for Moog, because the more it spends on capital now, the less it has to in the future, and the extra cash (which Moog has) can go to other ventures such as stock buybacks. Therefore, growth is not a problem when speaking of this mid-cap company.

In addition, value is also a strong point of Moog. According to Capital IQ, Moog has a forward P/E ratio of 16.17. This number is clearly below the industry average near 36.05 and lower than all three forward ratios of the aforementioned companies (Varian: 21.01, Bio-Rad: 20.59 and Illumina: 45.11). This low number means that at the current share price, Moog is cheap relative to the rest of the industry. Moreover, looking at more valuation ratios, Moog's forward Price/Sales multiple (1.27) and Enterprise Value to Revenue multiple (1.54) for 2007 are both lower than its rivals (respectively, Varian: 1.92 and 1.76, Bio-Rad: 1.57 and 1.46 and Illumina: 6.99 and 7.25), including the fact that Moog has a tad more debt to its value that the other companies. Moog also has a below industry price to free cash flow ratio and price to book ratio, according to Reuters, of 13.28 and 2.29. From these data evidence, it is clear that Moog is undervalued relative to the rest of the industry.

Looking at a few more areas of this corporation, Moog is fairly solvent with an above-industry average current ratio of 2.52. Debt is a bit large relative to other related companies, but not by a significant margin, and the ROE Moog supports of 12.43%, while not amazing, is still fairly close to industry standards. CEO Robert Brady and his 7,273 employees have done a fine job with this company, and the recent acquisitions of Thermal Control Products and McKinley Medical should create synergies, allowing economies of scale to develop.

Overall, with the given information, Moog has strong growth potential, an undervalued status, and a diversified business strategy allowing for positive share price movement in linear fashion. Although the company does not provide dividends, the other factors are support enough to let investors at least think about purchasing shares. With a strong asset turnover ratio of 0.88 (above industry average) and combined growth and value PEG number of 1.26 (below all aforementioned companies), Moog is an excellent stock selection for any portfolio.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com or to view other articles written by him visit http://www.biraynetworks.co.nr