Rising Star Buy: More Textron

This article is part of our Rising Star Portfolios series.

When I first decided to purchase shares of Textron (NYSE: TXT  ) for my Messed-Up Expectations portfolio, I noted three things that I liked about the prospects.

First, each of the company's four production divisions -- Cessna (business jets), Bell (commercial and military helicopters), Textron Systems (military hardware), and Industrial (auto parts and specialized vehicles like golf carts and golf-course care) -- had been hit hard by the recession, but three of them have begun to bounce back.

Now, as of the last quarter, the fourth division, and formerly the biggest in terms of revenue -- Cessna -- has also begun to turn around, as shown in the following graphic.

Source: Company filings. TTM = trailing 12 months.

Plus, the Industrial and Bell divisions continued their climbs up from the bottom. Overall, the company saw revenue increase by 11.2% in the fourth quarter. The company expects to see revenue increases in all four divisions this year.

Business jet rebound
Second, as mentioned above, Cessna has begun to turn around. The Cessna division saw an increase of $105 million in the fourth quarter, reflecting delivery of 11 more jets than the previous year.

In the previous article, I quoted CEO Scott Donnelly as saying at the end of the third quarter, "And so while I'd say it's probably too early to conclude whether this really will be a turning point in the business jet order environment, we are encouraged by the level of customer interest." At the end of the fourth quarter, he said, "We're particularly encouraged by the pick-up in business jet and commercial helicopter demand, driven in part by the impact of bonus depreciation in the United States, but also reflecting relative stability in global economies and improving general business confidence."

Of course, competition is heating up, as well, as every business jet manufacturer benefits from a turnaround. Embraer (NYSE: ERJ  ) , for instance saw 25% growth in its executive jet deliveries in 2010, while General Dynamics' (NYSE: GD  ) Gulfstream business saw 7.4% revenue growth in the fourth quarter.

Third, there's still some messed-up expectation built into the share price. At Friday's closing price of $27.17 and using trailing free cash flow of $717 million, the market is expecting growth of 8% per year for the next five years, 4% for the following five, and then 2.5% from then on (discounting at my 15% hurdle rate). That's higher than what was seen previously, but it's not as high as I believe we'll see as the sales recovery really begins to kick in over the next several quarters.

That's three, here's one more
The debt situation continues to improve. Textron's net debt position has decreased from $9.45 billion at the end of 2008 to $5.38 billion at the end of 2010. A good portion of that drop comes from the continued liquidation of the finance division's positions.

In short, the investing thesis originally laid out is working. As a result, tomorrow, the MUE port will increase its investment in Textron by another $350, which represents an increase from a 2% position to 4%.

Once you've added Textron to My Watchlist, come to the MUE discussion board for further talk on this company and the others in the portfolio, or follow me on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Fool analyst Jim Mueller doesn't own shares of any company mentioned. He works for the Motley Fool Stock Advisor newsletter service. Embraer is a Motley Fool Stock Advisor selection. The Fool owns shares of General Dynamics and Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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