Textron Stock is the Definition of a Sleeper Hit
Textron Inc. (NYSE:TXT) is one of the smaller aerospace and defense companies. Like many of its sector peers, it benefits from generous defense budgets. But Textron also has exposure to the executive jet market, given that it owns iconic brands such as “Cessna,” “Hawker,” “Bell Helicopter,” and “Beechcraft.”
There has been the perception that because of low crude oil prices, demand for business jets has slowed. The weaker financial position of many oil companies has affected the private plane market in general.
Still, Textron stock has suffered an unfair penalty. The general market perception of the business jet market has clouded the fact that Textron actually makes money. It has solid financials. It’s also growing. Perhaps the recent years of tighter defense budgets has also affected the perception of Textron’s ability to generate revenue.
The sense is that investors should do their homework on TXT stock. Indeed, this is a sleeper. The company has clearly shown good performance, which could prompt more bullish sentiment in 2017. Textron will release its third-quarter 2016 earnings on October 20, and all indicators are that TXT shares could see a nice increase.
Textron Has Delivered Solid Earnings in 2016
TXT stock is now trading at about $39.00-$40.00, but there’s a potential for the company which makes the fastest plane that any private citizen can buy (the almost-Mach 1-capable “Cessna Citation X”) to reach a new record altitude of over $47.00/share, or 17%, say analysts. Over the past quarters, Textron stock has consistently beaten analysts’ revenue expectations.
For example, in Q2 of this year, Textron delivered net earnings of $177.0 million and adjusted earnings per share (EPS) of $0.66. Both figures were higher than analysts’ predictions. Revenue, for example, was $3.51 billion for the quarter, beating the expected $3.3 billion. (Source: “Earnings Reaction History: Textron Inc. (NYSE:TXT) has a 61.54% chance to rise,” The Independent Republic, September 27, 2016.)
What many have not realized is that apart from the likelihood of a higher defense budget—especially if Hillary Clinton moves back into the White House— Textron’s Cessna division continues to sell jets. There is a rapidly rising sector in the air service industry known as “air taxi.”
Cessna makes the “Cessna Citation Mustang.” It’s small, efficient, and—by BizJet standards—dirt cheap. It also makes a profit and remains the most popular plane for the hugely successful air taxi industry. (Source: “GlobeAir plans fleet growth as profits soar,” FlightGlobal, January 27, 2016.)
The more success that companies like GlobeAir AG enjoy, the more sales that Cessna gets. In a related development, one of Cessna’s historic competitors, Beechcraft, became part of the Textron group in 2013.
Textron Can Hedge Between Strong Markets in Civilian and Military
Meanwhile, if the name Textron sounds like a “Transformer” from the famous movie franchise, it’s rather appropriate. It so happens that, like the popular action figures, there’s much more to Textron than meets the eye. Textron makes drones; it’s one of the leaders in adapting military drone technology to civilian uses.
Drones are going to be one of the diamond points of a new logistics—and possibly transportation—revolution. Amazon.com, Inc. (NASDAQ:AMZN) has already presented its own drone, which it hopes can one day soon do away with human couriers. Drone sales have almost doubled and Textron has more coming.
Military intelligence missions will be increasingly performed by drones. Their demand is proven by the fact that the U.S. Air Force still uses “U2” aircraft— designed in the 1950s—in some cases. Yet there are few alternatives.
Drones are taking over. Textron recently showed off its latest. It’s a high-tech tiltrotor that can fly around the clock for long periods; providing intelligence, surveillance, and reconnaissance; taking off from ships at sea. (Source: “Bell Textron reveals plans for unmanned tiltrotor drone for Marines,” Amarillo Globe-News, September 23, 2016.)
In the next few years, global tensions will increase as the all-but-declared new Cold War with Russia—and China—continues. Textron should benefit from more sales of military and commercial drones. Drone technology is one of the most adaptable from military to civilian and vice-versa. As it happens, some drones fly and others float. (Source: “Navy Drone Ship “Kits” to Change Amphibious War,” Scout.com, September 28, 2016.)
Despite its important acquisitions, Textron also presents a favorable leverage position. Its adjusted debt is 2.4 times earnings before interest, taxes, depreciation, and amortization (EBITDA). Textron also pays a small but reliable dividend of $0.02 per quarter. Textron has all the cards to soar in late 2016 and into 2017, thanks to growth potential coming from civilian and military markets, where the company can continue to increase revenue and earnings.