Beechcraft Acquisition Lifts Textron’s Results As The Business Jet Market Improves

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Textron (NYSE:TXT) reported solid growth in its third quarter results on higher business jet deliveries and cost synergies from the acquisition of Beechcraft, the maker of King Air turboprops. The company’s third quarter revenue rose 18% annually to $3.4 billion. Beechcraft’s acquisition, which was completed in March earlier this year, contributed roughly 14% to Textron’s third quarter top line growth, while the company’s remaining top line growth came primarily from its industrial segment. Higher margin at Textron’s aviation segment, which includes the businesses of Cessna and Beechcraft airplanes, boosted the company’s third quarter earnings to 57 cents a share, up from 35 cents a share in the year ago period. This sooner-than-expected realization of cost synergies from Beechcraft acquisition enabled Textron to raise its 2014 earnings guidance to $2.05-2.15 per share, from $1.92-2.12 per share announced earlier. [1] Last year, the company had earned $1.75 per share. [2]

We currently have a stock price estimate of $38 for Textron, around 5% ahead of its current market price. We are in the process of incorporating Textron’s third quarter results and shall update our analysis shortly.

See our complete analysis of Textron here

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Beechcraft’s Acquisition Drove Growth In Textron’s Q3 Results

On March 14, 2014, Textron completed the acquisition of Beechcraft, which is a major manufacturer of general aviation airplanes. Textron obtained the highly valuable King Air turboprop airplane franchise from this acquisition, which nearly doubled Textron’s aviation revenue to $1.1 billion in the third quarter. [1] During the quarter, this segment delivered 33 new business jets to customers worldwide on higher demand, up from 25 jets that the segment delivered in the same period last year. [1] At its earnings presentation, Textron said that it is seeing availability of used business jets and turboprops decline in the market. We figure this trend likely helped grow Textron’s business jet deliveries in the third quarter, and if availability of used general aviation airplanes continues to fall in coming months, then buyers will likely be compelled to purchase new airplanes, boosting Textron’s airplane sales. During the third quarter, Beechcraft also delivered 30 King Air turboprops, compared with 26 turboprops that it delivered in the third quarter of last year. [3] Thus, the acquisition of Beechcraft has come at a time, when shipments of business jets and turboprops are rising.

Additionally, at the time of announcing Beechcraft’s acquisition, Textron had said that it will likely realize significant cost synergies from integrating its Cessna unit with Beechcraft. Gains from these synergies were evident in the third quarter results, as margin at Textron Aviation, which was constituted by merging Cessna and Beechcraft, rose sharply resulting in segment profit of $62 million, compared with a loss of $23 million in the year ago period. [1] In addition, higher delivery volume of business jets and turboprops also likely helped in margin expansion at Textron Aviation. Looking ahead, we figure with a gradually improving global general aviation airplane market, Textron Aviation’s operating margin could continue to improve in coming years.

Gains from Textron Aviation were supported by modest revenue growth at Textron’s industrial segment, which includes various businesses: Kautex automobile fuel tanks, Jacobsen turf care equipment, E-Z-GO golf cars, and Greenlee power tools. Many acquisitions including TUG Technologies, Dixie Chopper and HD Electric completed in the recent past contributed to this revenue growth at Textron’s industrial segment in the third quarter.

Lower Commercial Helicopter Deliveries By Bell Tempers Q3 Growth

Surprisingly, commercial helicopter deliveries by Textron’s Bell unit fell sharply to 41 units in the third quarter, from 54 units in the same period last year. [1] The global commercial helicopter market had improved steadily over the past few years on rising demand from the emerging countries 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 has been able to deliver just 121 commercial helicopters to customers worldwide, With only one quarter remaining in 2014, we figure Bell’s commercial helicopter deliveries in 2014 will likely fall short of its 2013 tally of 213 units. So, commercial helicopter deliveries will likely continue to temper growth from higher business jet deliveries in Textron’s results in the fourth quarter.

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Notes:
  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. Textron’s 2014 Q3 earnings transcript, October 17 2014, www.seekingalpha.com []