ESCO Technologies (ESE): A Strong Finish to 2024 and Eyes on the Horizon

ESCO Technologies (NYSE:ESE) has delivered a robust performance in its fiscal year 2024, capped by a fourth-quarter earnings report that highlights its position as a leader in engineered components and systems. With organic growth, strategic acquisitions, and record backlog levels, ESCO is well-positioned to capitalize on opportunities in defense, energy, and advanced technology markets.

Q4 2024: Growth and Margin Expansion

ESCO’s Q4 2024 sales rose 9.5% to $299 million, driven by double-digit growth in its Aerospace & Defense (A&D) segment and steady gains in Utility Solutions Group (USG). Adjusted EPS surged 16.8% to $1.46, reflecting improved pricing power and cost discipline. Full-year operating cash flow hit $128 million, a $51 million increase from 2023, signaling strong liquidity.

The standout performer was the A&D segment, which saw sales jump 16.2% in Q4 to $124 million, fueled by demand from U.S. Navy programs and international defense contracts. The segment’s adjusted EBIT margin expanded to 19.4%, underscoring ESCO’s ability to extract value from high-margin defense projects.

Backlog and Orders: A Signal for Future Growth

ESCO’s $879 million year-end backlog—the highest in its history—provides a solid foundation for 2025 revenue. While Q4 orders dipped 14.9% to $289 million due to delayed Navy contract timing, full-year orders grew 9.7% to $1.1 billion. The A&D segment’s $564 million in annual orders (up 20.6%) highlights long-term demand for defense systems.

However, the RF Test & Measurement (Test) segment faced headwinds, with sales down 5.3% year-over-year due to wireless market softness and delays in China. Orders in Test also declined, though its $159 million backlog suggests stabilization.

Strategic Moves: Acquisitions and Portfolio Shifts

ESCO’s $550 million acquisition of Ultra Maritime’s SM&P business—a UK-based provider of naval systems—marks a bold move to expand into AUKUS markets and deepen its ties to U.S. allies. The deal, pending regulatory approval, aligns with the company’s focus on high-value defense contracts.

Conversely, ESCO’s review of its VACCO Space business signals a strategic shift to prioritize segments with clearer growth paths. If divested, the company could redeploy capital toward higher-margin areas like A&D or SM&P.

2025 Outlook: Ambitious but Achievable

ESCO’s guidance for fiscal 2025 is ambitious yet grounded in its current trajectory. The company expects:
- Sales growth of 6–8%, with A&D and USG leading at 7–9% each.
- Adjusted EPS growth of 12–17%, rising to $4.70–$4.90 from $4.18 in 2024.
- Margin expansion, with adjusted EBIT margins improving to 15.3–15.7% from 14.8% in 2024.

The Q1 2025 outlook of $0.68–$0.75 EPS (up 10–21%) suggests a strong start to the year, supported by the A&D backlog and USG’s steady utility demand.

Risks and Challenges

Geopolitical risks, particularly delays in SM&P’s regulatory approval, could disrupt plans. The Test segment’s struggles in wireless and China also merit caution. Additionally, the VACCO review’s outcome remains uncertain, though its divestiture could simplify ESCO’s focus.

Conclusion: A Compelling Investment Case

ESCO’s fiscal 2024 results and 2025 guidance paint a compelling picture of a company leveraging its niche expertise in defense and energy infrastructure. With a record backlog, margin improvements, and strategic acquisitions like SM&P, ESCO is positioned to outperform peers in a sector often constrained by geopolitical volatility.

The stock’s forward P/E of ~20x (based on 2025 EPS guidance) appears reasonable for a company with 10–15% EPS growth visibility. Meanwhile, its dividend yield of 0.5% (with a history of modest increases) adds to its appeal as a stable, growth-oriented play.

Investors should monitor the SM&P deal’s progress and Test segment recovery, but the fundamentals suggest ESCO remains the “best in the biz” for engineered components. With a 12–17% EPS growth target for 2025, the path to outperformance is clear—if risks are managed effectively.