What was it John Steinbeck said about plans, mice, and
men? And did he mention anything about the defense
industry?
Well, he should have
As earnings season progresses, we're seeing the
recession take a toll upon defense contractors, an industry
that that has -- perversely, as it turns out -- made a point
of balancing its core business with sizeable investments in
the civilian economy.
Boeing 's (NYSE: BA) the most obvious
example: a world-class defense contractor whose commercial
airplanes division is floundering.
General Dynamics is another. Wednesday's
earnings news revealed a superb defense business there,
hobbled by languishing salesof civilian business
jets.
And of course, there's
Textron (NYSE: TXT). The maker of Bell
helicopters, Cessna airplanes, and Shadow unmanned aerial
vehicles (UAVs) reported Q3 earnings Tuesday. There's no way
to sugarcoat the news: Profits dropped 98%, leaving Textron
with a meager 2% of what it had earned just one year ago.
Ouch!
Indeed. But Textron isn't crying. To the contrary,
management sounded strangely optimistic. True, revenue is
down in every segment but one (Textron Systems). And that
segment builds UAVs, a business that everyone is crowding
into these days, including
L-3 Communications (NYSE: LLL),
Lockheed Martin (NYSE: LMT), and
Honeywell (NYSE: HON).
In short, Textron probably can't count on beaucoup
profits, with so many rivals competing for the same pieces of
UAV pie. But management tells us we
cancount on two things:
financial morass. No longer interested in being in the
same business that sank Bear Stearns, and laid
AIG (NYSE: AIG) and
Citigroup (NYSE: C) low, Textron shaved
another $700 million off its "managed receivables" book in
Q3. And just like last quarter, it seems to have avoided
taking too big a bath on the divested assets.
Manufacturing free cash flow hitting the promised $300
million to $400 million range. Textron's cash profits
give us a touchstonefor remembering the firm's true
value.
Foolish takeaway
Granted, with Textron's shares now fetching more than
four times what they sold for at the March low, there's
probably not a whole lot of value left to be captured here.
(In fact, if Textron ends the year with anything
lessthan $400 million free cash flow, I'd argue the
shares are overvalued.)
But make no mistake:
It's not the blowoutthe headline numbers suggest.
Have any thoughts on Textron or defense in general? Make
yourself heard in the comments area below.
This article was originally published as
Recession: 98, Textron: 2on
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