Textron: Crawling From The Pit Or Falling Back?

| About: Textron Inc (TXT)

Textron (NYSE:TXT) is a conglomerate mainly focused on aerospace. This article looks at Textron, compares the performance of the Bell and Cessna divisions with peers and an outlook for the future.

FUNDAMENTALS1

Textron 2013 2012 2011 2010 2009 2008
Revenue $12,104 $12,237 $11,275 $10,525 $10,500 $14,010
Net income $498 $589 $236 $86 -$31 $486
EBIT $797 $841 $337 $86 -$149 $629
EBIT% 6.58% 6.87% 2.99% 0.82% -1.42% 4.49%
FCF $214 $447 $640 $714 $777 $205
EPS $1.75 $2.00 $0.79 $0.28 $-0.12 $1.94
Dividend $0.08 $0.08 $0.08 $0.08 $0.08 $0.08
Dividend Yield 0.22%
ROA 3.85% 4.52% 1.73% 0.56% -0.16% 2.43%
ROCE 8.02% 8.83% 3.15% 0.68% -0.92% 4.12%
ROE 11.36% 19.69% 8.60% 2.89% -1.10% 20.54%
Debt/Equity 2.64 3.36 3.96 4.14 5.70 7.47
PE (Price/Earnings) 18
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The past 5 years have been difficult for Textron. 2009 was a very bad year. 10,300 employees were fired and 23 facilities were closed.

Revenue and EBIT have gradually improved, but are not in a positive uptrend (yet). Revenue in 2013 was less than 2012 and EBIT was lower. The FCF is declining year on year, which can be a sign of future problems.

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Textron has the following divisions:

Cessna: is the fixed wing aerospace division of Textron. The aircraft types range from single-engine aircraft to the (small) Citation business jet.

Cessna 2013 2012 2011 2010 2009 2008
Revenue $2,784 $3,111 $2,990 $2,563 $3,320 $5,662
EBIT -$48 $82 $60 -$29 $198 $905
EBIT% -1.72% 2.64% 2.01% -1.13% 5.96% 15.98%
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Bell: is the helicopter division. A broad range of helicopters are maintained and manufactured for civilian and military use. The V-22 Osprey - which was designed in cooperation with Boeing (NYSE:BA) - is a tilt-rotor design with a huge export potential.

Bell 2013 2012 2011 2010 2009 2008
Revenue $4,511 $4,274 $3,525 $3,241 $2,842 $2,827
EBIT $573 $639 $521 $427 $304 $278
EBIT% 12.70% 14.95% 14.78% 13.17% 10.70% 9.83%
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Textron Systems: produces defense products and services. Some are also aviation related such as Lycoming engines or unmanned aerial systems.

Textron Systems 2013 2012 2011 2010 2009 2008
Revenue $1,665 $1,737 $1,872 $1,979 $1,899 $1,880
EBIT $147 $132 $141 $230 $240 $251
EBIT% 8.83% 7.60% 7.53% 11.62% 12.64% 13.35%
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Industrial: makes industrial products such as golf carts or automotive fuel systems.

Industrial 2013 2012 2011 2010 2009 2008
Revenue $3,012 $2,900 $2,785 $2,524 $2,078 $2,918
EBIT $242 $215 $202 $162 $27 $67
EBIT% 8.03% 7.41% 7.25% 6.42% 1.30% 2.30%
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Financial: supports customer purchases of Textron products. Since the economic crisis started, other financial services and business lines were exited.

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The Revenue and EBIT % charts clearly show that:

  • Cessna is the main problem;
  • Bell is the most profitable division.

PEERS

Both Bell and Cessna are compared with peers to see how they operate within their market segments.

Bell (helicopter division)

The main competitors for Bell in the US are:

And from Europe:

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Bell is the most profitable helicopter manufacturer in the world, according to the results published. Revenue is rising, but the EBIT% is slightly lower in 2013. According to the FY 2013 press release this was caused by:

  • Lower military margins;
  • Manufacturing inefficiencies related to labor negotiations;
  • Implementation of a new enterprise resource planning system.

Cessna (business aircraft)2

Textron and most other business aircraft manufacturers don't provide financial information which can be used to compare them. In most cases business aircraft are included in a general overview of aviation manufacturing activities.

The comparison is based on delivered aircraft; these figures are more reliable than orders. For Cessna only the Citation aircraft are included.

The main competitors are:

  • Bombardier (OTC:BOMBF)(OTCQX:BDRAF) from Canada which is compared with Embraer (NYSE:ERJ) from Brazil in the battle for bronze;
  • General Dynamics (NYSE:GD) with the Gulfstream; this will be the next article in the aerospace series;
  • Dassault Aviation (OTC:DUAVF) from France.

The dramatic decrease in delivered Citations indicate the problems. It is not clear from the reporting if the decline in demand is the main cause. High labour costs may be an important issue too.

BEECHCRAFT ACQUISITION

In December 2013 Textron announced that it acquired Beechcraft for $1.4B in cash.

Beechcraft certainly has added value for Cessna. The successful Beech [Super] KingAir is an aircraft type which is becoming more popular because of lower fuel consumption. It complements the Cessna Citation.

The worldwide maintenance infrastructure Textron set up over the last few years, can also service Beech aircraft.

There are also important negatives.

Beechcraft filed for bankruptcy in 2011, prompted by a prolonged slump in sales and a heavy debt load.

By acquiring Beechcraft, Textron increases its exposure to the defense market. Worldwide defense budgets are under strains and margins are declining. Textron named lower margins as one of the causes of decreasing profitability in 2013.

FUTURE

Textron is a question mark for now. It can go both ways.

Although results are improving (compared to a few years ago), the Cessna division is still the main problem. Buying Beechcraft might be overstretching and could increase the problems. Beechcraft is another potential problem that has gone bankrupt in 2011.

A strong positive is the willingness of Textron to enhance its maintenance infrastructure worldwide to service customers more adequate. By adding Beechcraft this infrastructure can be better utilized. Beechcraft adds scale to Textron, but it might also tip Textron over.

Textron started a Joint Venture with CAIGA to assemble Caravan aircraft that will sold in China. This opens the door to the Chinese market where there is a huge potential for a broad range of Cessna aircraft: the Caravan and Citation among them.

Bell, the helicopter division, is the most profitable in the world (of helicopter manufacturers) and the V-22 Osprey has a huge export potential.

Textron also developed a Scorpion Intelligence, Surveillance and Reconnaissance (ISR)/Strike aircraft. The Scorpion was developed within 24 months, but seems like a desperate and useless action.

There are already a number of aircraft with similar capabilities produced worldwide and they are not best-sellers.

INVESTING

Textron is an interesting company with a lot of potential, but at a PE of 18 is too expensive considering the risk involved and Textron's recent results.

It is better to wait for signs of improvement. Cessna needs extra attention. Will the Beech acquisition add value or will the EBIT drop further?

Footnotes

1. Financial data sources are from annual and other reports published by Textron.

  • Stock price used: USD 36.40

2. All charts are created by Confero.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.