Textron Inc. (NYSE:TXT) has lagged the market higher -- gaining just 8.2 percent year to date as of Monday's closing price ($26.83). In April, the stock sank when the company cut guidance, though the price has since recovered much of that gap lower.
In fact, today Goldman Sachs (NYSE:GS) downgraded the stock to Neutral from Buy. Though GS has a price target of $32, I am not that optimistic and believe, at least in the short run, that TXT's recent rebound presents an opportunity to go short.
The best way to do so: sell the September 2013 $27-29 call spread for a net credit of $0.81.
The stock closed Monday's trading session at $26.83. In the past year, the stock has traded in a 52-week range of $22.15 to $31.30. Technical indicators for the stock are neutral. TXT has a market cap of $7.45 billion, and is part of the industrial goods sector.
The Argument - Valuation
The bottom line is that Textron is trading at 8 percent above its intrinsic value of $25.12, meaning the stock is overvalued at these levels. Textron's total Debt/Equity is another bad sign, sitting at 118.70 percent, which is much higher than our model accepts. Additionally, TXT's current Price/Sales ratio is 0.63, slightly above its industry peers. With a beta of 1.87, TXT is implied at a higher volatility than the S&P 500.
All this goes to say that TXT is overvalued.
But business isn't looking up for Textron. During the first quarter 2013, Textron cash and cash equivalents shrunk from $1.378 billion in 2012 to approximately $701 million. Simultaneously, profits in its Bell Unit, which makes military and civilian helicopters and is the company's largest unit by revenue, fell 11 percent, while revenue fell just 4.5 percent.
Cessna, another unit, deliveries dipped from 38 business jets to 32 -- leading that segment, which also makes small propeller-driven planes, to lose $8 million during the quarter.
Despite technical indicators that have yet to break down, Textron is a stock poised for a sell-off. From a risk-return perspective, selling the TXT call spread may present an opportunity to collect a premium on a higher-volatility stock that has lagged the market.