Cessna and Beechcraft Get Together at Last


Beechcraft AT-6 Texan II. Still waiting for liftoff. Source: Wikimedia Commons

Fresh out of its bankruptcy earlier this year, Hawker Beechcraft has found a home. On Friday, fellow planebuilder and defense contractor Textron (NYSE: TXT  ) announced that it is buying Beech Holdings, LLC, the parent of Beechcraft Corporation, for approximately $1.4 billion in cash. And if not quite a match made in Heaven, it's at least a match made in the heavens.

As described by Textron, Beechcraft today is "a leading manufacturer of business, special mission, light attack and trainer aircraft." Between sales of new aircraft and revenues collected from servicing and maintaining the 36,000 Beechcraft-, Hawker-, and King Air-brand planes in service around the globe, Beechcraft generated $1.8 billion in revenues this year. Thus, Textron is getting its rival for a very fair price of just 0.78 times sales -- a tidy discount to its own shares' 0.85 P/S ratio.

The deal makes sense from a business, as well as a financial, perspective. As Textron CEO Scott C. Donnelly explained, Beechcraft's "iconic King Air product line perfectly complements our Caravan and Citation jet line-up and our combined global service network will deliver the superior level of services expected by our Cessna, Beechcraft and Hawker customers." It will also help the combined plane maker give Gulfstream owner General Dynamics (NYSE: GD  ) a serious run for its money in the business jet market.

Meanwhile, the addition of Beechcraft's line of AT-6 light attack aircraft to Textron's own new creation, the Textron AirLand Scorpion, roughly doubles Textron's portfolio of budget combat aircraft. That's twice the chances Textron will have to win a contract with some military, somewhere, to begin making a go of this business.

Meanwhile, from Beechcraft's perspective, this deal will soften the blow, and mitigate the risk to its viability, suffered when Embraer (NYSE: ERJ  ) beat out the AT-6 for a lucrative contract to supply light attack aircraft to the Afghan military earlier this year.

Foolish final thought
If I've one reservation about the deal, it's this: To date, Beechcraft has not been particularly successful at winning contracts with the military, or generating profits from its business. At the same time, Textron will have to go deeply into hock to buy its new subsidiary. Management anticipates having to take out as much as $1.1 billion in new debt to finance its purchase. That will push Textron's debt load up past $4.4 billion -- nearly half its market cap -- and with little reserve cash to offset the debt.

That wouldn't worry me so much if Textron was currently generating positive free cash flow with which to pay down its debt. But it isn't. So it does.

Dividend lovers will hate this deal
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. That's why it's especially distressing to think that Textron, whose dividend is already minuscule, might have to cut it to help pay down debt from its Beechcraft deal.

Want some better ideas for dividend stocks? Our analysts recently sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2013, at 1:22 PM, AviationGuy wrote:

    I'm also concerned that since Textron is so very dependent upon their Bell Helicopter division for income from its defense contracts (V-22 Osprey, UH-1 Huey and AH-1 Cobra), and the DoD's budget woes, if they aren't maybe counting their chickens just a bit too early.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2777893, ~/Articles/ArticleHandler.aspx, 10/22/2014 10:06:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement