At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
As investors don their napkins and head to the Thanksgiving table to dine on turkey, Deutsche Securities suggested they pause and give thanks for a bird of a different color: Textron (NYSE: TXT) -- whose prospects are improving, and whose stock is downright cheap.
On Tuesday, the Teutonic megabanker blessed Textron with a "buy" rating and a $28 price target (about 30% above today's price). Why? Opines Deutsche: "Macro indicators such as ... business jet utilization and used aircraft for sale continue to trend in the right direction ... the business jet market has stabilized and is poised for double-digit shipment growth in 2012 and beyond."
That's good news for everyone involved in the business jet business -- General Dynamics (NYSE: GD), maker of the Gulfstream; Embraer (NYSE: ERJ), a Brazilian powerhouse in the b-jet business; Berkshire Hathaway (NYSE: BRK-B), which reaps downstream revenues from renting the airborne buggies to corporate suits; even Goldman Sachs (NYSE: GS) -- which in partnership with Canada's Onex, owns the Hawker Beechcraft line of b-jets that it bought from Raytheon (NYSE: RTN) four years ago. But the news is best of all for Textron. Notes Deutsche: "As the largest manufacturer of business jets, Textron (through its Cessna division) is one of the best ways to play a recovery in business jet demand."
It's hard to fault Deutsche's logic here. If business jet demand really is reviving, then clearly that's good news for Textron. But ... is it rising? And is it rising enough to make Textron's stock a buy? That's what we're here to find out, and we're going to start with one of the best predictors I know for an analyst's rating success: a look at how successful its picks have proved in the past.
Let's go to the tape
One of the biggest bankers in the world, Deutsche isn't necessarily the first banker you think of when thinking aerospace stocks. Fact is, Deutsche's historically focused its efforts elsewhere, such as the oil and gas industry, where its dozens of picks are collectively outperforming the S&P 500 by nearly 1,000 percentage points, total. (Yes. You read that right. Almost 1,000.)
Recommendations of stocks such as ConocoPhilips -- a longtime Deutsche favorite, enjoying no fewer than three separate recommendations over the past four years, two of them successful -- have helped lift Conoco into the exalted ranks of the top 10% of investors tracked on CAPS. But here's the good news: When it comes to picking aerospace stocks, Deutsche's no slacker either.
Fact is, with a record of better than 72% accuracy in the aerospace and defense industries, Deutsche is actually a better aerospace investor than it is an oil-stock picker. Over the years, it's picked such winners as:
|
Company |
Deutsche Says |
CAPS Says |
Deutsche's Picks Beating S&P by |
|---|---|---|---|
| Hexcel | Outperform | ** | 48 points |
| BE Aerospace | Outperform | ***** | 31 points |
| Honeywell (NYSE: HON) | Outperform | **** | 27 points |
And now here comes Deutsche again, and this time it's telling us Textron could easily do as well as any of these. Is Deutsche right?
They may be right. They may be crazy.
Maybe a better question is: "Is Deutsche out of its ever-loving mind?!" I mean, pick General Dynamics to profit from a rise in business jet purchases. Pick Embraer. Heck, go ahead and recommend those jerks at Goldman Sachs if you must. At least all of those b-jet plays are profitable. But why in heaven's name would anyone want to buy Textron, which has no trailing profits to speak of, and a P/E ratio of infinity?
Here's why: Because P/E doesn't tell the whole tale at Textron. While it's true the company that, due to an array of one-time charges necessitated by the company's ongoing restructuring efforts, Textron is currently profit-less, Textron has something even better than GAAP profits: Free cash flow. Tons of it.
The company hasn't recorded negative free cash flow in any year this side of the millennium. And even as Textron was telling the IRS it earned nothing over the past 12 months, it actually generated more than $1 billion worth of cash profits for its shareholders. What that works out to today is a company selling for less than six times the amount of cash it can generate in a year. An enterprise that, even with its significant debt load factored into the equation, sells for less than 12 times free cash flow.
Foolish takeaway
Now, do I agree with the Wall Street consensus that Textron will grow these profits at better than 50% per year, as Yahoo! Finance tells us it will -- and will continue growing at 50% for the next five years straight? No. Seems to me, there's something out of whack with these assumptions.
But however fast the company ultimately ends up growing, Textron's no turkey. Between Deutsche's demonstrated stockpicking acumen in aerospace, and the clear undervaluation of Textron shares today, I'm willing to give this recommendation the benefit of the doubt. Textron may not grow at 50%, but I'll just bet they can manage the upper-single-to-lower-double-digit growth necessary to justify today's low stock price.
