Textron (TXT): Flying Through the Fog

TXTTextron (TXT) is in some serious trouble as evidenced today by slashing their dividend by 91%, down to a penny each quarter. The company makes Cessna private plans, Bell Helicopter, EZGO golf carts, as well as having significant exposure to auto manufacturing supplies. These times could not be much worse for Textron as corporate executives take heat almost daily for flying private, and no corporation wants to fight the PR battle that comes with a purchase like a Cessna. Furthermore, there are less and less consumers with the money to afford one of these expensive toys, and even the Federal government under the direction of President Obama is going to hold off on upgrading the Marine One helicopter fleet, although that contract would have been with Lockheed Martin (LMT) instead of Textron anyway. Listen to Jim Cramer’s ribbing of the company on Wednesday night’s Mad Money:

“Textron blew out the yield today. They cut it pretty big. Let me just get that because it’s worth it to focus on it. I have not liked Textron. There’s whole ads out about the private plane business. Boy, that’s a bad business. They slashed the dividend 91% to preserve capital. I don’t know about Textron. I think it’s a ‘for whom the bell tolls’ company.”

In this instance he is chastising a caller who holds Textron. Apparently the caller was not listening to Cramer on 2/3 when he went on a tirade about them saying:

“Everything that could go wrong and plus a few things that shouldn’t have gone wrong went wrong for Textron…Who wants to buy a corporate jet in this environment? You have to think you will be burned in effigy or burned for real by an angry mob! What CEO wants to tempt fate like that? Second, Textron has a finance division and it’s a total black hole. With non-performing assets up 77% over the previous quarter…Talk about a company totally not in control of its fate. Private jets. Finance. Wait — can it get any worse? Yes! Because, third, Textron also has a cyclical manufacturing business that supplies, are you ready, the automakers, oh man! It’s volumes were down 20% and for all industrial businesses are expected to be down 20-25% in 2009 because of the weak global economy. Number four, Textron, it’s got a money problem. The company still has occasional difficulty tapping the commercial paper market for short-term financing…Textron, a ship already filling up with water and looking like it will capsize if things get even a little bit worse.”

Ockham’s Take: Clearly, not much is going Textron’s way right now, and the headwinds will like continue for the foreseeable future. We are not surprised in the slightest that the dividend was slashed today; with the difficulty that Textron has right now a yield of over 15% was laughable.

As you can, see our rating on Textron is Undervalued, but this is based on comparing the company against itself over the last ten years, and given the revenue and cash flow it is generating the company appears cheap by our methodology (almost unavoidable for a company down 90% in a year). However, as users of our site have become familiar with by now, this company receives our “Sticky Note of Doom”. These sticky notes on a user’s web browser are a way to tell our clients that there are factors that cannot be properly accounted for using historical metrics. Our goal with these devices is to help users avoid catching the “falling knifes” that can look very attractive in a value methodology.

At this point, TXT is in a heap of trouble with revenue in all four major divisions flagging, they will need a lot of help to get through the recession if there is much longer to go. If indeed they do survive, and we wish them well, they will almost certainly recover from these very low levels eventually. But there is no sign that a recovery is forth coming any time soon in Textron’s business, and current shareholders could have their shares diluted by a secondary offering down the road.

Textron: Flying Through the Fog

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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