Textron Taking Off
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Textron (NYSE: TXT) reported 4Q 2011 results and the stock took off to the tune of a 14% one-day advance. The stock is up 38% since I recommended it here on Dec. 8, 2011. There is still plenty of upside in the name and I would continue to recommend it to new investors. If history is a guide, the initial pop will likely be followed by a slow bleed up.
The upside was driven by the rebound in the Cessna division, the key thesis to my initial recommendation. For those who balk at buying a name following such a move, I would turn your attention to General Dynamics (NYSE: GD), where its Gulfstream potential has yet to be recognized by the market.
Textron is a diversified conglomerate comprised of business jets, helicopters, military, and industrial segments. Sales exceeded $11 billion for the year, an advance of 7% over 2010. The company’s key brand is Cessna jets, which is currently 26% of sales. Bell Helicopters is 31% of sales and the breakdown is one-third commercial and two-thirds military. Textron Systems adds 20% of revenues and is comprised of unmanned aircraft systems, tanks, intelligence, and weapons. The Industrial segment contributes 25% and the financial unit just 2% as it is being slowly eliminated as the pieces roll off the portfolio.
The financial segments lead to a 6c loss in the 4Q as impairments on the assets are marked-to-market. Adjusting for a pretty messy quarter leads to a profit on continuing operations of $0.49 per share versus $0.20 a year ago. EPS from continuing operations finished the year at $1.31, a 90% advance from depressed levels a year ago. The big upside in the stock likely came from management guidance, which called for 2012 EPS in the range of $1.80 to $2.00 on double digit growth in the company’s two key brands, Bell and Cessna. The Industrial segment continues to track GDP growth while the defense unit is expected to be relatively unchanged.
Valuation still attractive
Despite a 38% advance, the stock still looks relatively cheap, albeit to a lesser extent than when I recommended it. The price-to-sales ratio has expanded from a super-depressed 0.4x to 0.6x. The price-to-earnings is a bit elevated at 19x, but not bad in the context of potential earnings growth. Again, management is forecasting 35% to 50% EPS growth for 2012. The forward P/E, which I use with a great deal of caution, is a more modest 14x at the conservative end of guidance. The net loss for the quarter combined with the surging share price has pushed the price-to-book up to 2.5x and more in-line with historical averages. The free cash flow yield is still a respectable 5.7%.
The stock has been a winner since I initially recommended it, but it still offers plenty of upside to long-term investors. Valuation still looks reasonable and earnings have plenty of upside potential should Cessna rebound as I expect. Again, one must remember that this is a very cyclical stock and a global recession, which I am not forecasting, would pressure shares immensely. And don’t forget that General Dynamics is also positioned to be winner, which I recommended here, with less cyclicality than Textron.
The Motley Fool owns shares of General Dynamics and Textron. market8 has a beneficial interest in TXT, but not GD. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.