Textron Systems - Tremendous Potential For This Small Segment

Aug.28.14 | About: Textron Inc (TXT)

Summary

Textron Systems is the defense systems division of Textron Inc.

The division has hit a big of a rough patch, leading investor to wonder if the division is in trouble.

The division is growing and diversifying across the DOD, leading to many new opportunities in the future.

Textron Inc. (NYSE: TXT), a diversified manufacturer is most widely known for its Cessna aircraft, of which the company has captured 41% of the private business jet market worldwide. After that comes Bell Aviation, the helicopter manufacturer responsible for 37% of the company's revenues and 60% of the company's profits. The company's third division, by size, is the industrial manufacturing division, which produces hydraulics and other machines in addition golf carts. However, it appears that Textron's fourth and smallest division may be a huge catalyst for this company. Textron Systems, the weapons development and defense contractor segment, accounts for only 15% of its profits but has the possibility to be a major growth opportunity for Textron.

Textron Systems and the Rise of the Unmanned Systems Market

Textron purchased AAI Company in 2007 for $1.1 billion, and with it acquired a host of defense and UAV subsidiaries. The most notable of its newly acquired products was the high profile Shadow drone, a reconnaissance drone capable of recognizing targets from an altitude of 8,000 ft. at a distance of 35 kilometers. However, Textron has expanded its developments within the Department of Defense and continues to win contracts across the services for both air, land, and sea systems, including a new version of the Shadow, designated the ShadowM2 , and the Common Unmanned Surface Vessel (or CUSV) for the US Navy. Recognized as a leader in the mid-sized UAV segment, the division's recent slump has made many investors question if there is still an upside to this division's potential.

In the Unmanned Systems Integrated Roadmap published earlier this year, the Department of Defense has already laid out that the industry is expected to double in the next 10 years to $89 billion in both civilian and military applications. Even before analyzing the military implications for Textron Systems, the fact that the Department of Defense is projecting that the growth of Civilian drones will grow as quickly, if not more so is good news for Textron. As one of the current major manufacturers of UAVs the recent FAA authorization to allow commercial drones to begin operations within the US gives Textron the ability to not only cross sell products across its divisions, but also use its footing in the mid sized drone market to sell to companies who need bigger drones that can travel further than the small reconnaissance drones developed by competitor AeroVironment (NASDAQ: AVAV).

Textron Systems Financials

Within Textron Systems, the division responsible for their weapon systems, things have hit a bit of a rough patch. Earning only $1.6 billion of its total $12.1 billion in total FY2013 revenues, Textron's recent Q2 earnings call showed that the recent decreases in military budgets have left a mark on its balance sheet. Total revenues for the quarter for Textron systems fell from $422 million in Q2 2013 to $282 million in Q2 2014. For the current fiscal year, Textron systems have fallen to $645 million from $851 million at this point last year. The $206 million loss arose from a $99 million decrease in volume from is marine and land systems and a UAV loss of $99 million due to the timing of deliveries. Despite the decrease, Textron Systems has achieved a current 6-month profit margin of 11.3 % over the 8.5% margin at the same time last year, meaning that despite the loss of total revenue the division is still boosting its probability. Additionally, the division has a current backlog of $3 billion, meaning that there are plenty of opportunities to maintain its business line while bidding on new government proposals.

Textron Overall Financials

In a broad sense, Textron seems to be doing well. For FY 2013, Textron had revenues of $12.1 billion, just slightly lower than the $12.2 billion in revenues from 2012, and Textron looks to be halfway through a good year for FY 2014. In its recent 2014 Q2 report, Textron posted revenues of $3.5 billion over the $2.8 billion in the same quarter last year. The company's other 3 divisions reported improved revenues for the quarter and the company can use those earnings to keep Textron Systems afloat while looking for new opportunities. With a Wall St. consensus 12 month target price of $46.00 per share, a P/E ratio of 18.36 compared to the industry average of 16.90 and a PEG ratio of 1.17 , this looks to be a company that looks to be fairly valued and make use of its other divisions to adapt to changes in current defense spending. With the expected growth in unmanned systems over the next 10 years from the Department of Defense roadmap, this is one company that seems to be positioned to take advantage of future growth.

Conclusion

Textron Systems is still a relatively new division within Textron Inc, and, with the strength and diversity of their other divisions, can afford to have a difficult year. This is a company that has decided that merely repeating their past successes are not enough, and are expanding quickly to meet the growing need in the UAV and unmanned systems market within the Department of Defense. With the eventual opening of the commercial market for oil companies, movie studios and other possibilities, Textron stands ready to deliver to both the defense and civilian markets.

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.