A Quick Look: Textron Inc. (NYSE: TXT)

Textron (NYSE: TXT)

Business Profile: Textron Inc. (NYSE: TXT) is one of the world's largest and most successful multi-industry companies. Founded in 1923, we have grown into a network of businesses with total revenues of $11 billion, and approximately 40,000 employees in 32 countries, serving a diverse and global customer base. Headquartered in Providence, Rhode Island, Textron is ranked 190th on the FORTUNE 500 list of largest U.S. companies. Organizationally, Textron consists of numerous subsidiaries and operating divisions, which are responsible for the day-to-day operation of their businesses ("Textron businesses").

Textron’s Business Segments:

Bell: The Bell segment includes Bell Helicopter [2], Textron Systems Corporation [3] and Lycoming Engines [4]. Bell Helicopter is a leader in the global helicopter industry and the pioneer of tiltrotor aircraft. Textron Systems provides innovative technology solutions to meet the needs of the global aerospace and defense industries. Lycoming Engines is the world leader in reciprocating aircraft engines.

Cessna: Cessna Aircraft Company is the leading worldwide manufacturer of general aviation aircraft, with product lines spanning single-engine piston aircraft, utility turboprop aircraft and Citation business jet models. Citation customers have access through a network of 10 company-owned Citation Service Centers.

Industrial: The Industrial segment is a diverse collection of high-powered industrial businesses including Greenlee E-Z-GO, Jacobsen Kautex , and Fluid & Power Group as well as various smaller brands within the Fluid & Power Group.

Finance: Textron Financial is a diversified commercial finance company with core operations in Aviation Finance, Asset-Based Lending, Distribution Finance, Golf Finance, Resort Finance, and Structured Capital.

Textron 2006 Revenue breakdown

Textron 2006 Segment Profit Breakdown

Source: Company website.

Recent Quarter (3Q07):

Textron reported a solid 3^rd quarter with revenue increased 15% (13% organic sales growth) to $3.3 billion. Earnings per share from continuing operation increased 40% compared to 3Q06. The strong operating performance in Textron was continued to be driven by strong demand for business jets (Cessna) and continue strong military spending (Bell). Cessna’s backlog continues to show strength with 609 business jet orders added to date. All of Textron’s business segments show top-line growth and margin expansion. Top-line growth at Textron was mainly driven by increase in volume and offset by inflation. The Finance segment continued to perform in spite of a shaky credit market. Full year free cash flow now expected to come in at $600-650 million. The free cash flow would likely be used for strategic acquisition (recent purchase of UIC), and for shareholder enhancement (shares repurchases).

Risk factors: (Source: Textron 2006 10-K filing)

-Textron might unable to effectively mitigate pricing pressures. (Industrial segment)

-Delays in aircraft delivery schedules or cancellation of orders. (Cessna)

-19% of revenue derived from U.S. Government. (Bell)

-U.S. Gov’t can terminate contracts with Textron at anytime. (Bell – V-22s)

-Cost overruns on U.S. Gov’t contract

-Interruptions of production and supplies chain and labor disruptions (All manufacturing segment)

-Disruptions in the capital market. (Finance segment)

-Macro economics factors: interest rate, currency and raw material prices

-Legal proceeding and claims.

Overall, Textron is a very solid industrial company that is more aerospace and defense oriented. The management was able to keep cost under control as we saw segment profit margin expanded during times of high commodities prices and higher labor costs. The big question for TXT's future is how well can the non-military related segments weather out a potential slow down in the global economy? That has yet to be seen.

3,2,1..... CHINA!

We love China. Why? The Chinese stock market is making new high everyday. And if you were invested in Chinese equity in any way in the last couple of years, you should have done quite well.

Now, I have personally developed this stock market indicator. This indicator is quite accurate. It has accurately predicted the Tech Bubble of 2000. The indicator is called, my dad indicator. The best thing is, the indicator is free.

I remembered that my pop got very vocal about the market in 1999. He was complaining to my mom about selling stocks out too early, and not buying the next best stock. So, he took control of the family savings soon after. He bought some awesome companies. First, he bought Yahoo (Nasdaq: YHOO) at $200 a piece. Then he bought Lucent (Nasdaq: ALU) for about $60 a share. This was, of course, in the early 2000. Well, needless to say, not too soon after he made those trades, everything crumbled into pieces.



All of this bring me back to last couple days where my pop got very vocal again. He was constantly arguing with my mom. They usually argue about b.s. like most married couple, but these days, he was complaining about my mom management of the family savings (which is, for the most part, invested in Chinese equity through H-shares listed Chinese companies). He started to grill stock quotes every night. And he would flip through the finance pages of Chinese newspaper. He would make believe that he is the Chinese Warren Buffett.

I've recently suggested to my mom to buy into a Chinese railroad company (NYSE: GSH HKEX: 0525.HK). So she bought it and it went up about 12-15% since she bought it. It was a nice profit in a short period of time. Yesterday, my pop, would go through his usual routine and checks his stock quotes, and he would complain to me about how bad my pick had lagged the best performers (such as PetroChina NYSE: PTR HK: 0857.HK). I would simply ignore him and tell him to sell it and buy something else. Which he did.

Last Sunday, my pop read about a Chinese coal producer in a Chinese newspaper. The company name is China Shenhua (HK: 1088.HK) and the article in the paper mentioned UBS has just upgraded the stock and gave it a target price of 2x from where it is trading right now. My pop came into my room and inquired about the company. I pulled up the info. on the company real quick on Yahoo Finance and saw that the stock is trading at a P/E of 50. Immediately I said, "expensive, Google is only trading at 30-35 P/E, I would rather have Google if I want to pay that much." He would go on and complain about low P/E stocks never moves.

However, his question in the Chinese coal company got me thinking. As a commodity producer, your top-line revenue growth comes from the price you charge for the commodity you are selling. And the price is determine by the market/demand for the commodity. So it makes sense that a coal producer in China can be very well off because of China's rising demand for energy. Then it hit me like a brick: at a certain price point, it would become cheaper for coal consumers to import coal from other part of the world- this would limit the demand and price paid for Chinese coal. I'm no expert on coal, but the coal in China can't be THAT much better than coal from the U.S. right? So why would anyone pay a premium for a Chinese coal producer over a U.S. coal producer?

The poor Chinese citizens in China are only allow to buy Chinese stocks (A-share and recently H-share). So they don't have access to the U.S. stock market. Poor folks.

And looking at my pop and his recent behavior, I would say the Chinese stock market is closing in on a top (even if it's just a correction).

The Good, the Bad and the Ugly

ECON 101 Review-

Output (GDP) = Consumption (C ) + Government spending ( G ) + Business Investment ( I ) + Net export ( NX )

The Good

Capacity Utilization- The assets are being used to produce. Although not quite at 1990s level, we are producing at a healthy rate. If we are producing, we are growing.

Unemployment Claim- Unemployment claims is at all time low: when people have jobs, they will spend. It’s not that difficult. What worries me is that this indicator is dangerously low- see 1999.

Unemployment rate and earnings- same story here. Earnings are at +4%. The more they make, the more they spend.

Business investment and consumption- No surprise here, both households and businesses are spending at a healthy clip. That’s the I and the C in the equation.

The Bad

Consumer sentiment – We are starting to see some deterioration in consumer sentiment. It is dipping a little bit low. This indicator seems to be more volatile in comparison to last economic expansion in 1990s. My guess is that the high oil price and War in Iraq were constantly on the consumers’ mind.

Consumer confidence – We are slightly above 100 here. These two consumers indicators are important because consumption makes up a good chunks of our GDP.

GDP and Chain Deflator – The weak U.S. residential market has taken the wind out of our economy. The question is can we get back to the normal 3-4%.

ISM- If it’s above 50, we are expanding. And if we are below 50, we are contracting. We are dangerously close to dipping below 50.

Construction – Commercial construction is still healthy, but it looks like we might be close to the peak. And we all know the residential construction story by now.

Durable Goods – If we aren’t buying durable goods, what are we spending on?

CPI – I don’t care about volatility, but how can you measure prices of basket of consumers’ goods without Food and Energy. Last time I check, I need to eat to survive.

Auto sales- We are trending down slightly since the peak at 1999. Why are we buying fewer cars?

Federal Budget – I’m surprised to see that we are actually creeping back to a balance budget. It is still in a horrible shape since we have a surplus in our last economic expansion.

And the Ugly

Housing Starts and permit – Partying like its 1995!

Median New Home Price – What do you want me to say? This is just plain UGLY.

Saving Rate – I suggest a couple of rate hike so we can see saving goes back up again. We are in a serious hole and a major down trend.

Export – China, anyone? A little uptick is cause by recent weakness in the USD.

Well, so far, so good. We have consumption and business investment remain intact, but the problem is- How much longer?

High gasoline prices wouldn’t shake the consumers out of their spending spree. If we are to look at the cost of owning a car, we can easily pinpoint that gasoline is a minor cost in owning a vehicle (you just bought a $35,000 BMW and you can’t afford to put $50 gas in it?). Employment and outlook on employment is the key to today’s economy.

No jobs= no spending = ▼ C = ▼ GDP.

Note: Briefing.com is the best.

Leveraged Debt Boom

So I guess my predictions on the Yankees sweeping the hapless Indians is not going to be true. Little do you people know though that I truly do not care that the Yanks don't true. In fact, it may be even better that the Indians were ALLOWED TO WIN the 1st game of the series. Let's take a look at their record when they win/lose the first game of the ALDS.

2006 Yanks won first game to Detroit, lost series
2005 Yanks won first game against Angels, lost series
2004 Yanks lose first game to Twins, win series
2003 Yanks lose first game to Twins, win series
2002 Yanks won first game to Angels, lost series
2001 Yanks lose first game to As, win series
2000 Yanks lose first game to As, win series
1999 Yanks sweep Texas
1998 Yanks sweep Texas
1997 Yanks won first game against Indians, lost series
1996 Yanks lose first game to Texas, win series
1995 Yanks won first game against Mariners, lost series

Since the beginning of the ALDS series, the Yankees are 2-5 when they win the first game of the series and a PERFECT 5-0 when they lose the first game. Ladies and gentlemen, this is all set up for the Yanks to win the next 3 games (at Yankee Stadium no less and Steinbrenner gets to sell more tixs and concessions) and wipe the pathetic Indians off their playoff run.

Now that I have gotten that off my chest, back to this blog being more Wall Street oriented.

Here is an interesting article from the FT today on Citi selling part of their bridge financing loans to (drumroll) ........ KKR ...... of all entities.

http://www.ft.com/cms/s/0/a4075160-7081-11dc-a6d1-0000779fd2ac.html
http://www.ft.com/cms/s/0/68aa7404-72f6-11dc-b7ff-0000779fd2ac.html
http://www.ft.com/cms/s/0/9c737cfc-71ef-11dc-8960-0000779fd2ac.html

For those not familiar with bridge loans, they are promises to a private equity firm like KKR that the bank will lend them the necessary funds to buy out their target company. In the midst of the subprime loan scandal and thus a credit crunch, the banks were having a difficult time offloading these loans to the investors. PE firms like KKR of course would still benefit because they are getting the financing no matter what the credit environment is whereas the banks obligated to complete the loan. It then became a situation of the loans sitting on the banks' books and thus increasing their risk and aggravating shareholders everywhere.

Now Citi is turning around and attempting to sell off these loans (at discount of course) to .... the same private equity firm that are using the loans like KKR. Does this strike anyone being as ironic?

Think of it this way. Your parents promises to lend you the down payment on your house and it's a promise that you know they are good for. Before you can finalize the closing process, your parents were fired from their jobs and thus are in need of their savings. Now their original commitment to you to fund the down payment is in jeopardy but their word is their word. So what do they do? Instead of trying to decrease the loan commitment, they turn around and borrow the money from you to give back to you for the down payment. Is this odd or what? Basically the only person who benefits is you because you essentially have a free loan in that whatever interest you have to pay to your parents for the loan are negated by the interest your parents owe to you.

Now back to the scenario of Citi selling the loans to KKR which is even better because KKR obtains the loans on a discount, thus boasting the yield (in essence the true interest income) which would offset the interest expense owe to Citi for making the original loan commitment. KKR truly comes out on top as they would save (or even make) money on the deal from 1) interest income vs. interest expense and 2) fees and gains from opening the vulture leveraged debt fund.

Usually it's the investment banks like Citi who makes off good but this time it is heavily in the favor of their clients. Wall Street does not get any better than this. Stay tune for more on this developing drama of private equity fleecing the banks.

Go Yankees!


-Myth

Yankees vs. Cleveland

This is completely unrelated to the premise of the blog but I'm posting it anyway because the Yankees are so great.

Here are some stats for you to chew on as you ponder how it is possible that the “experts” are wrong in predicting the outcome of the Yankees vs. Cleveland.

Game 1
C.C. Sabathia - Lefty

Career versus the Yankees in 8 starts is 1-7 with a 7.13 ERA and a whopping WHIP (walks plus hits per innings pitched) of 1.75 (meaning that he allows close to 2 base runners per inning, not good). Of course pundits will point to the fact that he had not faced the Yankees since 2004 and that his Cy Young caliber season this year (19-7, 3.21 ERA, 1.14 WHIP) makes him a completely different pitcher. I beg to differ as C.C will always be C.C. For proof, I can point to his other great season in 2002 where he went 13-9 with a 3.60 ERA and a 1.30 WHIP. In that season, the Yankees crushed him in his 2 games started and he went an ugly 0-2 with a 5.54 ERA with a 1.38 WHIP.

As for the Yankees hitters faring against this lefty, it is safe to say that A-Rod and Jeter will utterly destroy him as they have gone 474 and 583 OBP respectively in their lifetime. The only worry for the rest of the Yankees lineup is Damon and Abreu who really stinks against Lefty. This is more than countered by Posada, Cano, and Matsui who can hit lefty pitchers just as well as righty. The X factor in all this is Shelley Duncan who hits big (303 BA) against lefty pitching this season.

Conclusion: CC will lose game 1 yielding 5-6 runs although he will keep Cleveland in the game for a while.

Game 2
Fausto Carmona – Righty

Here is the fabulous sophomore pitcher that all the “experts” rave about in the Cleveland lineup. What these “experts” don’t know his that this guy sucks against the potent Yankee lineup. In the 2 games against the Yanks this season, he sports a mediocre ERA of 4.15 but this is a false statistic as he allows the Yanks to hit 292 off of him.

For the Yankee hitters, the reverse of CC holds true as all the lefty does phenomenal against him including Damon and Abreu with A-Rod stinking. Jeter though hits a robust 429 while getting on base 50% of the time.

The only positive for Carmona is that post All-Star he was nothing short of Cy Young like including an exclamation point of going 5-0 with a 1.78 ERA and a whimsy 0.99 WHIP in September. Of course this is all tempered by his other volatile months preceding it.

June: 5.82 ERA 1.50 WHIP
July: 1.74 ERA 1.09 WHIP
August 3.43 ERA 1.24 WHIP
Sep 1.78 ERA 0.99 WHIP

Notice the whipsaw up and downs in ERA and more importantly, WHIP. Seeing how this pattern would unfold, I sense that October would yield a bad month for him and greatness for the Yankees. I’m personally hoping for a repeat of his marvelous June performance.

Conclusion: Fausto will allow at least 5 runs as the heavy lefty hitting Yankee lineup will get to him as well as his see saw pitching history and he will lose the game.

Game 3
Jake “the castoff” Westbrook – Righty

Ah yes, Yankee castoffs. Of all the ones the Yankees had let go, which includes a nice lineup of Eric Milton, Ted Lilly, and Javier Vazquez, it is safe to say that none of them had much affect on the Yanks in the postseason (only exception is Kenny Rogers which is perhaps due to the steroids he is taking that is currently unknown to the press and MLB). Once a castoff, always a castoff, as they would never be good or why else would the Yankees let them go.

The story on Westbrook is pretty much the same as Fausto as lefty hitterse had feasted on him throughout the season. Yankee righties including A-Rod and Jeter also had success with him batting over 300. Coupled our tremendous hitting with the legendary heckling of Yankee castoffs and it is safe to say that Westbrook will falter … horribly.

Conclusion: Yanks will score at least 8 runs and blow out Cleveland.

I haven’t even gone into how horrendous their closer is (blowing the most saves in the regular season and close to singlehandedly killing my fantasy baseball team) so this only goes to prove that even if their starters last, their bullpen will give it right back up.

I smell a SWEEP. As they say, you could take the regular season away from the Indians (96-66 tied for best in MLB) but you can’t take the Indians away from being the Indians (0 championships in the modern era including the big choke in the 1997 WS).


-Myth



Note: My predictions are based on complete, unbiased, statistic backed proof on the greatness of the Yankees which does not include the aging starting lineup and the fragile bullpen aside from Joba so you can take it with confidence.