Beechcraft Acquistion Should Raise Textron’s Net Despite Weak U.S. Military Spending

Textron (NYSE:TXT) will announce its fourth quarter and full year 2014 results on Wednesday, January 28. The multi-industry company is coming off a good third quarter in which it reported healthy growth in revenue and profit driven by the acquisition of Beechcraft. In the fourth quarter, we anticipate that Textron will continue to post growth in its results as gains from the Beechcraft acquisition and rising industrial sales will likely more than offset weak commercial helicopter sales by Bell.

For full year 2014, Textron has forecast its earnings to lie around $2.05-2.15 per share, up from $1.75 per share in 2013. ^{[1] [2]}

We currently have a price estimate of $40 for Textron, around 5% below its current market price.

See our complete analysis of Textron here

Beechcraft’s Acquisition Will Drive Growth In Q4 Results

Textron acquired Beechcraft, which is a major manufacturer of general aviation airplanes, in March 2014. Textron obtained the highly valuable King Air turboprop franchise from this acquisition, which more than doubled Textron’s aviation revenue to nearly $1.1 billion in the third quarter. Growth from Beechcraft has been instrumental in lifting Textron’s overall revenue by nearly 14% annually in the first three quarters of 2014. ^[1]

The Beechcraft acquisition came at a good time for Textron, as the global general aviation market is improving. Demand for business jets is recovering – annual global shipments rose for the first time in 2013 after steadily falling for many years in a row. In 2013, 678 business jets were delivered worldwide to customers, up from 672 business jets that were delivered in 2012. ^[3] This growth has persisted in 2014, enabling Textron to deliver 33 new business jets to customers in the third quarter, up from 25 business jets that it delivered in the third quarter of 2013.

In addition, at its last earnings presentation, Textron said that it is seeing the availability of used business jets and turboprops fall in the market. We figure that this trend is also helping grow Textron’s new business jet and turboprop deliveries, as buyers are being compelled to purchase new airplanes with the falling availability of used ones. In the previous quarter, Textron’s King Air turboprop deliveries rose to 30 units, from 26 units in the year ago period. So, in a growing market, Textron’s business jet and turboprop deliveries are likely to continue to rise in the fourth quarter, driving its results higher.

In addition, Textron’s industrial segment, which includes Kautex automobile fuel tanks, Jacobsen turf care equipment, E-Z-GO golf cars, and Greenlee power tools, should post moderate growth in the fourth quarter. Rising demand from emerging markets is driving growth in this segment. Textron is focusing on expanding its international sales capacity in emerging markets by expanding its dealer and service network. In the first three quarters of 2014, Textron’s industrial segment sales rose by nearly 10%, and we figure that this growth will likely persist in the fourth quarter.

Low Commercial Helicopter Deliveries, Weak U.S. Military Spending

Strong revenue growth, driven by the Beechcraft acquisition and higher industrial sales, could be tempered in the fourth quarter by weak commercial helicopter deliveries by Bell and lower government military spending.

In the third quarter, Bell’s commercial helicopter deliveries surprisingly fell to 41 units, from 54 units in the same period last year. The global commercial helicopter market had steadily improved over the past few years on higher demand from emerging markets, especially China, resulting in Bell’s commercial helicopter deliveries rising to 213 units in 2013, from 188 units in 2012. ^[2] However, in the nine months ended September 2014, Bell was able to deliver just 121 commercial helicopters to customers worldwide. So, we figure full year 2014 commercial helicopter deliveries by Bell will fall well short of its 2013 tally, weighing on Textron’s fourth quarter and full year 2014 results.

Separately, growth in Textron’s fourth quarter top line will also be tempered by lower sales from its defense segment, Textron Systems. With the U.S. government military spending remaining weak, overall contract volume for the Textron Systems segment has declined in recent years. In the nine months through September 2014, sales at this segment fell by 20% annually. That said, as this segment constitutes only about 10% of Textron’s overall revenue, the impact from this declining revenue on the company is limited.

Steady Margins Should Translate Top Line Growth To Profit Growth

Textron will likely be able to translate its fourth quarter top line growth into profit growth, as margins are expected to improve in the aviation segment with cost synergies from the Beechcraft acquisition. We see no other major challenges to Textron’s margin in the fourth quarter. So, alongside growth in its top line, Textron should report higher profit in the fourth quarter.

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1. Textron’s 2014 Q3 earnings form 8-K, October 17 2014, www.textron.com [↩] [↩]
2. Textron’s 2013 10-K, February 2014, www.textron.com [↩] [↩]
3. General Aviation Manufacturers Association’s 2013 report, February 2014, www.gama.aero [↩]