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Textron Is Well Positioned to Rise on Future Market Growth
Posted by: Damian Illia (IP Logged)
Date: April 25, 2014 04:47PM
Textron Inc. (TXT) is an aerospace and industrial conglomerate that makes Cessna business jets, Bell helicopters and industrial and military equipment and components. It operates through five segments: Bell, Cessna, Industrial, Textron Systems and Finance.
Textron is known around the world as we can appreciate looking at the revenues by geographic region: in 2012 were United States 62%, Europe 14%, Asia & Australia 10%, Latin America & Mexico 7%, Middle East & Africa 3%, and Canada 4%.Names such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, Lycoming, E-Z-GO and Greenlee, are valuable and recognizable.
On December 27, 2013, the company announced its plan to acquire Beech Holdings, a leading manufacturer of business, general aviation and defense turboprop and piston aircraft, for $1.4 billion in cash. This would be a solid strategic fit for Cessna, complementing and expanding the product line. It expects about $4.6 billion in annual revenue from the combination of Cessna and Beechcraft. Additionally, this type of deal makes synergies for the acquirer. Textron expects to generate $65 million of annualized synergies in 2014, excluding restructuring and deal costs, and more in the next two years. Days ago, after completing the takeover of Beechcraft in March 2014, it was identified redundancies in the units, so Textron told workers that it is eliminating 750 jobs. The layoffs will occur over the next 60 days.
This was not the only acquisition it made; it was the third in the final quarter of 2013. Textron closed two acquisitions of flight simulation and aircraft training product companies Mechtronix Inc. and OPINICUS Corporation.
Military Markets and Cost Productivity
Textron’s marine business remains focused on the U.S. military with a new generation of amphibious vessels called ship-to-shore connectors. It also made progress on a variety of product opportunities in international military markets.
The Bell business has been working through a new Enterprise Resource Planning system that will contribute to significant improvements in its manufacturing operations in the future.
The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a Zacks Rank # 1–Strong Buy, Huntington Ingalls Industries, Inc. (HII) could be the option.
Relative Valuation, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 23x, trading at a discount compared to the industry mean. During the past fiscal year, it reported lower earnings of $1.75versus $1.97 in the prior year, but earnings per share (EPS) have increased by 20%in the most recent quarter compared to the same quarter a year ago. This year, Wall Street expects an improvement in earnings ($2.25 versus $1.75).
In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, EPS and price performance were somewhat volatile in the ten year period but showed an interesting upward trend in the last two years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company.
Let´s compare the current ratio with the peer group in the next table:
Textron has a current ratio of 11.36% which is higher than the one registered by Embraer S.A. (ERJ) but lower than Huntington Ingalls Industries, General Dynamics Corp (GD), Boeing Co (BA) and Engility Holdings Inc (EGL). For investors looking for a higher ratio, Lockheed Martin Corp (LMT) has a tremendous ratio.
As outlined in this article, Textron has a strong presence in diverse areas of business. Further, the company cut costs and boosted productivity by adopting technologies like enterprise resource planning. Also expansion through acquisitions and important new product introductions are future growth drivers for the company.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Jeremy Grantham (Trades, Portfolio), Steven Cohen (Trades, Portfolio), David Dreman (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have taken long positions on it.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Guru Discussed: David Dreman: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: TXT, HII, ERJ, GD, LMT, BA, EGL,