The Company

Textron [NYSE:TXT] is an industrial conglomerate with businesses in the aerospace, defense, recreational vehicle and finance sectors. The company is organized into five segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance.

Textron Aviation encompasses Beechcraft, Cessna, Textron Airland, and the servicing of Hawker business jets. Last year, they acquired Able Aerospace along with Able Engineering and Component Services in order to better service and replace components of their aircraft.

Bell Helicopter makes up an entire segment, all its own. Being one of the leading suppliers of military helicopters and tiltrotor aircraft, Bell does business with both the US Government and foreign allies. The commercial side makes up more than a third of its revenue. As of June 8, their latest commercial product, the 505 Jet Ranger X, received FAA certification and can now reach their primary market after seeing success in China and, more recently, Canada.

Textron Systems focuses on a wide range of air, marine and land products including unmanned aircraft [drone] systems, weapons, sensors, simulators, training, and aviation mission support.

The Industrial segment owns various brands that provide fuel systems and functional components, specialized vehicles and equipment, and tools and other test equipment. Included in these companies is Kautex, E-Z-GO, Cushman, Textron Off Road, Jacobsen, Dixie Chopper, Ransomes, TUG, Douglas, Safeaero, Greenlee, Greenlee Communications, Greenlee Utility, HD Electric, Klauke, Sherman + Reilly, Endura, and most recently, Arctic Cat.

The Finance group is a business that consists of Textron Financial Corporation and various subsidiaries. The main role this segment plays is in financing purchases of aircraft, especially when the transactions occur cross-border.

Segment weight based on 2016’s revenue (in millions of dollars):

With that out of the way, let’s discuss what’s going on in the company.

 

Recent Acquisition

Textron recently acquired Arctic Cat on March 6, 2017. The acquisition cost the company a total of $316 million, but brings the opportunity to expand and further diversify Textron’s market options.

Arctic Cat Snowmobiles at Yellowstone National Park, image by www.recreation.gov

Second Quarter Earnings Report

Q2 2017 Earnings is expected in two weeks, July 19 {Before Market Open}.
Estimates vary between 0.50-0.60 EPS. Last year, Q2 EPS beat estimates at $0.66.

To gain a better understanding of where the company is, this year, let’s take a look at the last quarter:

Observing Q1 2017 as compared to Q1 2016:

  • Revenue has decreased about $108M, 3.38%
  • Total costs have decreased about $14M, 0.47%
  • Resulting Net Income is down about $49M, 32.67%

Management claims that decreased revenue from Textron Aviation ($121M) and Bell Helicopter ($117M) are mostly to blame for this issue. A lower military and commercial turboprop sales volume hurt Textron Aviation, while Bell Helicopter suffered from the H-1 program delivering fewer aircraft this quarter (3 delivered, vs 10 in 1Q 2016).

They also like to point out that these losses were partially offset by higher Textron Systems revenue, and higher revenue in their Industrial segment.

The following chart provides the last nine quarters of revenue and the subsequent expenses (in millions of dollars):

 

Further Financial Highlights

While last quarter’s results weren’t ideal, their financial position isn’t bad.

In the last quarter, Textron paid out $186M buying back shares of common stock, and $6M in dividends. Cash and equivalents at the end of the quarter totaled $997M, an increase of over 28% from the 1Q 2016. Common shares outstanding has decreased by 2.57 million over the same period, about a 0.95% decrease.

Last year, two weeks out from their second quarter earnings, the stock began a fairly steady 8.47% climb up until the earnings date. Beating estimates led to the new price being held rather proficiently.

A Speculative Opportunity

Beyond the upcoming earnings report, Textron is attempting to move forward with an exciting new opportunity. The Light Attack/Armed Reconnaissance program has been established since 2009 in an effort to find a new close air support aircraft that could replace the role carried out by the A-10 Thunderbolt II, B-1B Lancer, F-16 Fighting Falcon and the F-15E Strike Eagle. Each of these aircraft are perfectly capable of carrying out close air support missions, but the USAF is searching for an aircraft that could be more effective and efficient at carrying out this role. This led them to ultimately selecting the Embraer A-29 Super Tucano in November 2011, but a stop-work was issued in January 2012 over disputes from Textron. A recent decision to look once more, dubbing the demonstration program OA-X.

What’s important to note is that OA-X is not an acquisition contract – it is purely an experimental, stand-alone program. The USAF is using it to test the waters, essentially, and see what is out there. The fact of the matter is, however, that this isn’t even the first time OA-X has been attempted. In 2008, the concept was implemented, but such an aircraft was not found. This demonstration could easily lead to further contracts if an aircraft were to meet or exceed the requirements of the program. This would potentially be a huge deal for any company in the running.

OA-X is slated to occur late this summer, potentially into September. Currently, it is widely accepted that there are only three aircraft ready to square off at this demonstration:

Embraer’s EMB 314 (A-29) Super Tucano, a turboprop aircraft with a maximum speed of about 319 KIAS [knots indicated airspeed, about 367 mph], a stall speed of about 80 KIAS, and a range of about 720 nautical miles. Five hardpoints allow the A-29 to carry a variety of missiles, bombs, avionics and other equipment suitable for the mission at hand.

Beechcraft [TXT] AT-6 Wolverine, a turboprop aircraft with a top speed of 316 KIAS [about 363.6 mph], a stall speed of about 100 KIAS, and a range of about 2200 nautical miles with auxiliary fuel. With a total of 7 hardpoints, the AT-6 has the ability to host a wide variety of external loads, from weapons to sensors and communications systems. It should be noted that the Wolverine lost the contract in 2011 to the Super Tucano, but Beechcraft has offered it once more despite the previous letdown.

Textron AirLand [TXT] Scorpion, a dual-turbofan aircraft with a claimed top speed of 450 KTAS [knots true airspeed, approximately 518 mph], a stall speed of 95 KTAS, and a range of 1600 nautical miles with auxiliary fuel. It has 2 inboard [close to the fuselage, or body of the aircraft] hardpoints capable of carrying payloads of up to 1750 lb wet, two center hardpoints of up to 950 lb dry, and two outboard of up to 400 lb dry. It also boasts a modular payload bay, capable of carrying anything from sensors, fuel, communications systems and further ordinance.

Take note that Textron is in the running twice. A future contract in the shape of Senator McCain’s proposed ~300 aircraft could easily be priced in somewhere beyond 8 billion dollars, and Textron has a market cap of about 12.8B. Proving themselves in the OA-X would be potentially huge for TXT, bringing large returns for their investors.

 

Risks

Textron makes a large portion of their revenue as a US Government Contractor. In 2016 alone, about 25% of their income came from various governing departments and agencies. As such, they are subject to many of the typical risks such a contractor faces, from the necessity of obtaining and meeting contract requirements to the potential of overspending and not making any money from said contracts.

Demand for aircraft is difficult to forecast. Poor economic conditions could lead to cancellations and little business on this end. Relying on other companies for raw materials and components could lead to varying costs over time. Failure to perform by said subcontractors would lead to negative performance issues.

As a conglomerate, Textron may make further acquisitions in the future that could add their own risks and rewards to the picture. Doing business internationally brings in about 38% of their revenue, so this is a potential risk to consider as well.

 

Upcoming Stock Split

Since January 1, 1966, with the exception of the 70’s, Textron has split their stock 2/1 each decade. This is what has kept the company’s share value relatively low compared to its peers. The last time such a split occurred was August 24, 2007. I suspect a likely split sometime this year.

For those who are unaware, this is absolutely nothing to be concerned about. If you currently hold shares of a company during a 2/1 stock split, your share count doubles and the price per share halves; as such, you hold the same value in the company as before the split.

 

My Verdict

The share price for Textron, like most public companies in the defense sector, jumped substantially after the election last fall. I would not place my bets on OA-X panning out, but it’s certainly something to consider. I can see the Scorpion having potential outside of this program; especially to foreign customers who are looking for an inexpensive light attack aircraft.

In the long term, I believe Textron would be a great place to leave your money. Diversified better than many in the aerospace and defense sector, Textron has a great chance of making it through an uncertain future. But it won’t just survive- it will capitalize on many of the same benefits the rest of the sector may accrue, while also continuing to acquire new sources of revenue along the way.

 

Disclaimer

As of this moment, I do not own shares of Textron. My opinions are entirely my own and may or may not reflect the opinions of my peers on TickHounds. I am not being compensated for sharing my due diligence in any way other than what tips may be accrued.

Sources

NASDAQ Earnings Date
Textron Quarterly SEC Filings
Textron Annual SEC Filings
Senate Armed Services Committee Hearing: OA-X, pg 11-12

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