A High Flying Stock
Who doesn’t love a bargain?
It’s true: sometimes Wall Street overlooks a tremendous value – particularly when the analysts and investment bankers are more worried about keeping their jobs right now than they are about looking for diamonds in the rough.
Textron (NYSE: TXT) is one of those diamonds.
The company, which manufactures civil and defense aircraft as well as industrial products (like E-Z-GO golf carts), has seen its share price fall off a cliff since last May, when the stock closed as high as $64.23… as of this writing, Textron was trading at $6.81.
That price is pretty important – it means that Textron is selling for only 62% of the book value of its assets. It means that the company is on the market for only 3.5 times its earnings. It means that Textron is a bargain.
But why’s the company so cheap?
After all, the Textron has some market leading attributes that should be factored into that share price. Just look at its largest business segment, Cessna – probably the most recognizable brand in general aviation – which designs and builds aircraft ranging in size from their two-seat single engine SkyCatcher to the Citation business jets that whisk around the rich and famous.
The Textron’s helicopter subsidiary, Bell, builds aircraft like the V-22 Osprey used by the U.S. military. It also produces civilian helicopters used for everything from offshore exploration and rescue operations.
The company’s industrial segment includes the E-Z-GO line of golf carts and utility vehicles. It also produces blow-molded plastics and fiber-optic connections. Finally, there’s Textron finance, which provides financing for acquisitions and large equipment purchases.
Changing the Face of Aviation
Besides being a market leader, Textron is also changing the industry through technology. Currently, all new Cessna aircraft feature a “glass cockpit,” which means that flight instruments are displayed on digital screens instead of traditional dials. These instrument suites afford small aircraft a level of sophistication not available in some airliners. Trust me…
Textron is a company I know well – so well in fact that I've put my life in their hands for years. You see, as a pilot I've regularly flown their Cessna aircraft. This is a clear-cut case of Warren Buffett’s “stick with what you know” mantra.
It’s not because of my experience with Textron that I’m writing about it, however. It’s in spite of it.
Until now, I’ve been fairly averse to so much as looking at Textron. There’s no question that our current economy will have a markedly negative effect on the company’s performance right now. As other companies continue to cut back through 2009, the chances of a firm pondering the purchase of a corporate jet aren’t looking good. Likewise, the market for single-engine aircraft is highly affected by economic conditions – when people don’t have money they don’t buy planes.
The company’s Cessna cash cow isn’t immune to those factors.
Having said that, there are a couple of things that have made Textron difficult to ignore. For starters, its incredible value is compelling in and of itself. Second is the company’s backlog. While the market for private aircraft doesn’t look good for 2009, the fact of the matter is that Textron’s business segments currently have a backlog of $23.2 billion – meaning that they’re getting orders quicker than they can fill them. That’s a very good thing.
The company also isn’t resting on its laurels. In November 2007, Textron purchased Columbia Aircraft (now integrated into Cessna) for $26.4 million after a hailstorm severely damaged aircraft awaiting certification and delivery. The acquisition gave Cessna two new aircraft models, including the fastest fixed-gear single-engine airplane in production. Both have been extremely popular since Cessna resumed production.
Cessna’s in-house research and development is also roaring full speed ahead. In 2008, the company announced its newest business jet, the Citation Columbus. The Columbus will be the company’s largest-ever jet with seating for up to 10 passengers, and a range of up to 4,000 miles.
While the recession does provide concern for Textron, the company’s military contracting business, which provides more than 15% of revenues, should remain strong while the company waits out the economy.
Textron’s financial segment is another area that’s worried investors – the group actually recorded a loss for 2008. Because of a deteriorating credit environment, Textron has decided to close most of the Textron Finance arm. This is a good sign as it means the company will return to focus on its core competencies.
From a financial standpoint, Textron looks healthy. The company’s balance sheet looks strong, heavily weighted on the assets side. Textron’s debt load also looks palatable, helped in part by the drawing down of its $3 billion credit lines last week to repay its short-term debt and add liquidity to the balance sheet. The money isn’t due for repayment until 2012.
Wall Street wasn’t as receptive to Textron’s move to borrow the $3 billion, dropping shares to their lowest point in 18 years. That, incidentally, is the same time that subscribers added Textron to the portfolio in a Rhino Alert sent out on February 4. As of this writing, the position was up 23%.
From the income side, Textron reported an uncharacteristically weak quarter in their January 29 earnings call. The company recorded a net loss of $209 million compared with income of $256 million a year ago. Delving deeper, however, we can see that included in the quarter were the consequences of the decision to close Textron Finance down: a $293 million mark-to-market adjustment, a $169 million goodwill impairment charge, and a $31 million tax charge.
Indeed, despite the gloom and doom sentiment of Wall Street, Textron’s revenues actually increased slightly from the fourth quarter of 2009 to $3.6 billion.
You Won’t Believe These Dividends
But the most compelling part of the Textron story is dividends. As of right now, the recent drops in share price have lofted the company’s dividend yield to 15.1%. That means that regardless of what happens to the stock price in the near term, as long as the company continues to operate as it has been, you can expect a double-digit annual return paid quarterly in cash. That’s Textron’s selling point right now.
At its current price of $6.81, Textron is poised for some impressive growth over the next 18 to 24 months. Couple that with its impressive 15.1% dividend yield, and TXT begins to look hard to ignore.
Disclosure: TXT is a long position in the Rhino Stock Report’s model portfolio.