GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Davis and Snow Bought This Stock and You Should Too

March 19, 2014 | About:

The aerospace industry has received another blow with the crash of an Eurocopter AS350 in Seattle, on March 18. However, the episode had no repercussions on the stock market. As a matter of fact, Eurcopter’s parent company, Airbus Group (EADSY), saw a sudden stock price increment. This counter intuitive phenomenon has many explanations. Most interestingly, it seems to point at a certain weakness on the part of competitors. In other words, competitors are expected to acquire an advantage from each other’s mishaps. This particular incident challenges common knowledge and offers a good excuse to see what and how are Airbus Group’s competitors performing. In this opportunity, I would like to take a look at Textron (TXT).

Acquiring Businesses, Keeping Promises and Testing New Products

The latest acquisition by Textron is Beechcraft for an estimated sum of $1.5 billion. The deal includes the type certificates to the out-of-production Hawker 4000 and Premier IA, plus support organization Hawker Beechcraft Services. Besides completing the transaction announced late last year, the company made public the merger of Cessna, Beechcraft and Hawker into a new Textron Aviation business. “Uniting these brands creates a robust industry competitor, operating as one team with a common goal to serve customers everywhere our aircraft fly,” said Textron Chairman and CEO Scott Donnelly.

Another important announcement for the long term made by Textron concerns the $45 million incentive agreement the company signed with state and local governments in 2010. “We have spoken with state officials. Nothing is changing with the agreement at this time,” Beechcraft spokesperson Nicole Alexander said. Questions have risen due to the merger that implies a change on the employer count. Hence, the firm is at least enticed to keep the absorbed worked force stable in order to secure the $5 million stipulated in the agreement with state officials.

Strengthening portfolio and business stability is to be reinforced by the introduction of new products. Last December, Textron announced the successful first flight of the Scorpion Intelligence, Surveillance and Reconnaissance (ISR)/Strike aircraft. “The Scorpion compares very favorably to more costly aircraft currently used for low-threat missions,” pilot Dan Hinson said. The new product is expected to accommodate the budget constraints and shifting mission requirements of the US Department of Defense. The same department has granted the firm an additional contract worth $22.5 million to "deprocess" Mobile Strike Force vehicles and train the Afghan Army.

Why Did Gurus Increase Positions?

The impact of new product introductions by Textron on overall performance has been estimated by analysts at Zacks to roam around 18.5%. In addition to the Scorpion model, the Citation X, together with the Latitude and Longitude platforms are expected to hit the market between 2014 and 2017. Most importantly, the firm continues to dedicate time at improving its operational execution and cost productivity. This will guarantee operational margins, improving steadily since 2009.

An important characteristic to Textron is diversified at two levels: geography and segment. The firm’s geographically diverse network of aircraft, defense and intelligence, industrial and finance businesses negates any specific business risk. That has been a key in the recovery seen since the last economic crisis. Hence, debt has been slashed to a third while revenue and net income improve yearly.

Trading at 22 times its trailing earnings, Textron’s stock carries a 15% premium to the industry average. Also, the stock price is recovering the ground lost during the first half of March. This loss is small when compared to the rise in stock price registered throughout the second half of 2013. Their stock purchases confirm the strong growth prospects deposited in the firm. Given that the stock price is not expected to fall this may be one of the last opportunities to start a long-term investment for a while.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


Rating: 5.0/5 (2 votes)

Voters:

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK