With 54 combat aircraft, and 54 training aircraft in its air force, Argentina's military looks like a force to contend with -- on paper. In fact, it's more of a paper tiger.
Fully 75% of the country's training aircraft (which do double duty in border control) date from the 1970s and 1980s, and are in dire need of an upgrade. The country's entire fleet of A-4 Skyhawk fighters was permanently grounded for obsolescence earlier this year, leaving only 32 vintage, homegrown IA 58 Pucara turboprops to defend the country. Basically, its entire air force is in need of a facelift.
But before Argentina can put any modern fighter jets in the air, it needs to buy some modern training aircraft to teach its pilots to fly them.
Which is where our story begins.
Texans for Argentina
Earlier this month, Argentina placed an order to buy $300 million worth of new turboprop fighter planes for its air force. While you might think the Argentineans would buy local -- Brazil's Embraer (NYSE:ERJ) builds a highly regarded Super Tucano turboprop right next door -- Argentina instead elected to pay higher shipping and handling charges and order its planes from the U.S. of A.
Specifically, as revealed in a notification to Congress from the Pentagon's Defense Security Cooperation Agency (DSCA), Argentina has asked Congress to approve a sale of two dozen T-6C+ turboprops from Beechcraft Defense Co., a subsidiary of U.S. defense contractor Textron (NYSE:TXT).
Technically a "trainer" aircraft used to prepare pilots to fly more advanced jet fighters, the T-6 Texan boasts a top speed of Mach 0.67 and sports six wing-mounted "hardpoints" that can be loaded with weaponry. These characteristics permit the aircraft to be modified into a light attack aircraft, designated the AT-6. This would permit the aircraft to perform double duty as combat patrol aircraft -- at least until the country is able to buy some dedicated fighters -- while at the same time serving as trainer for the pilots who will fly the new fighters.
Indeed, according to DSCA, this is precisely Argentina's plan: "The proposed sale will revitalize Argentina's capability to train its pilots and fulfill border control missions, especially along its porous northern border. The Argentine Air Force (AAF) will use the enhanced capability to redevelop a professional pilot corps and as a deterrent to illicit activity."
What it means to investors
Currently, Argentina's trainer force includes both T-34 Mentor prop-driven trainers from Textron and EMB-312 turboprops from Embraer. So chances are that Argentina did, in fact, consider Embraer's planes for its training purchase before deciding to buy from Textron instead -- and investors might want to follow their lead.
Here's why: Embraer may make fine aircraft -- we've bought some of them ourselves, for use by the U.S. Air Force in Afghanistan -- but as a stock it's not much to look at. The company is barely profitable, with a net margin of just 0.4%, and its stock is trading at a P/E ratio of 125. Moreover, according to S&P Global Market Intelligence estimates, it's expected to grow earnings at only about 11% annually over the next five years.
In contrast, Textron boasts a profit margin (5.3%) more than 10 times as rich as Embraer's. Its P/E ratio of 14.9, while not exactly cheap when weighed against a projected growth rate of only 7%, is at least a whole lot more attractive than Embraer's three-digit multiple to earnings. Perhaps best of all, whereas Embraer generated only $82 million in free cash flow over the past year, Textron's cash profits came in at a much healthier $403 million.
Going forward, Textron is simply in a much stronger position than Embraer to negotiate deals and win contracts from low-budget air forces such as Argentina's. In fact, it's even possible we could see this month's Texan contract followed by a deal for Argentina to buy the budget-priced Scorpion light attack jet that Textron has been shopping around the globe. At least, an investor in the company can hope that's how things will play out.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 301 out of more than 75,000 rated members.
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