Shares of helicopter-maker Textron (ticker: TXT) look likely to continue their ascent.
They trade at 13 times trailing profits, versus 14.4 times for the Standard & Poor's 500 stock index. But profit margins for the broad market look nearly as plump as they've ever been, while those for Textron have room to rise.
Textron makes Cessna airplanes, Bell helicopters and other machines, from military drones to golf carts. Shares suffered a hard landing during the global financial crisis, astonishingly losing more than 90% of their value. Demand for corporate jets evaporated. Textron's financial division, which in prior years had expanded beyond loans for the company's gear to offer golf-course mortgages and timeshare construction loans, was left with sour loans and losses.
It didn't help that Time Magazine in September 2007 ran a cover story on the V-22 Osprey attack helicopter, made by Bell and Boeing (BA), and a key profit source for Textron, calling it ungainly, overpriced and "a flying shame."
Textron replaced many of its top managers in 2009 and began cutting costs and unwinding much of its financial business. The company's "noncaptive" receivables, or loan dollars it's owed for things other than machines it sells, have declined to $600 million from over $7 billion at the end of 2008.
J.P. Morgan analyst Joseph Nadol upgraded Textron shares to "overweight" from "neutral" earlier this month. Noncaptive receivables should hit negligible levels by year's end, he reckons, and demand for business jets recently ticked higher for the first time since the financial crisis. Textron delivered 183 of them last year, up from 178 the year before.
Nadol expects deliveries to approach about 250 a year by 2014. That's well below 2008's deliveries of 467 business jets, but it's enough to give margins and profits a substantial boost. Wall Street expects Textron's earnings per share to rise 31% between the end of this year and 2014, according to FactSet.
Textron's margins appear more sustainable than those for the broad market. Companies in the S&P 500 turned 9.4 cents of each revenue dollar into operating profit during the second quarter, versus an average since 1988 of 7.2 cents and not far from the all-time high of 9.6 cents reached in 2006 during the peak of the housing bubble. Textron, meanwhile, is expected to turn nine cents-per-revenue dollar into operating profit this year, versus an average of more than 12 cents from 2005 to 2009.
However, the Osprey remains a potential trouble spot for Textron. It should sell well over the next two years, but Textron's military contract for it comes up for renewal in 2015. Production could be cut in half after that, according to Nodal, and Textron so far hasn't been able to find many international customers for the attack copter.
Over time, however, the recovery in sales of private planes should offset reduced sales of the Osprey and restore investor confidence in Textron. So might a decent dividend. The company slashed its payment in 2009 to a token payment of two cents per quarter. That works out to a yield of 0.3% at today's share price. But with Textron's balance sheet looking healthy again, if it boosts its payment to one-third of profits, the typical payout for the S&P 500, shares would yield 2.6%.