USMC AH-1Z Vipers in flight. Image source: Textron.
April 1 is just around the corner, and if you're at all familiar with the workings of the U.S. federal government, you know what that means: Another fiscal quarter is coming to a close -- and anyone who wants to get their contracts signed, and their money spent, before the books close on the quarter, had better act fast.
That's great news for Textron (TXT 1.60%) stock.
The news
Last Thursday, in the biggest contract announced on Thursday, the U.S. Pentagon awarded Textron's Bell Helicopter division a contract to supply the U.S. Marine Corps with more than two dozen new utility and attack helicopters. Specifically, Textron will be asked to supply 12 UH-1Y Venom utility helicopters, along with 16 AH-1Z Viper attack helos, and 16 auxiliary fuel kits to attach to the latter.
According to the Pentagon's announcement, Textron's helicopter contract is valued at $461.1 million. But in fact, it's probably (a lot) bigger than that. According to the military hardware analysts at BGA-Aeroweb, the "flyaway cost" on a fully outfitted Venom helicopter is $25.4 million, and on a Viper, it's $29.9 million. This suggests that when all's said and done, the total value of Textron's contract is probably actually closer to $783 million -- even before accounting for the "16 auxiliary fuel kits."
Follow the money
According to BGA, about $20 million of the cost of a Venom or a Viper -- either one -- is attributable to the cost of the airframe itself. The balance of the cost goes to subcontractors such as General Electric (GE 0.80%).
GE supplies the T700 engines that power both the Venom and the Viper. And because each helicopter uses two engines, each Venom or Viper sold means an additional $1.5 million in revenue for General Electric. Millions more of the revenues flow through Textron to end up at other defense contractors supplying everything from avionics to air-to-ground weapons.
Still, Textron is the primary contractor through which all of these revenues flow. So, let's take a closer look at Textron:
|
Textron | |
|---|---|
|
Market capitalization |
$9.9 billion |
|
Revenue |
$13.4 billion |
|
Net profit |
$698 million |
|
Dividend yield |
0.2% |
Data source: Yahoo! Finance.
Textron's Bell Helicopter division builds both the Venom and the Viper helicopters. Although Bell is perhaps Textron's best-known business, it's actually only the third-largest of Textron's four major business divisions, taking in $3.4 billion in revenue last year. No Textron business makes better use of its revenues, though: Textron Bell boasts an operating profit margin of 11.7%.
Applied to the $783 million likely value of the Pentagon's purchase, therefore, this contract could easily be worth as much as $92 million to Textron.
Should you buy Textron stock?
$92 million -- that's a sizable chunk of the $698 million in profits Textron earned last year. But is this contract win enough to make Textron a stock worth buying?
|
Textron | |
|---|---|
|
Price-to-earnings ratio |
14.1 |
|
Price-to-free cash flow |
14.7 |
|
Price-to-sales |
0.7 |
|
Projected 5-year growth rate |
14% |
Data source: S&P Global Market Intelligence.
Possibly. Valued on its price-to-earnings divided by growth, Textron has a PEG ratio of just under 1.0. For value investors who consider a PEG ratio of 1 to be a "green light" to buy a stock, that's pretty attractive right there. Moreover, Textron's price-to-sales ratio of just 0.7 offers a significant discount to the "usual" valuation on defense stocks, which tend to sell for about one times sales.
I do admit to some worry about the fact that Textron isn't currently earning as much free cash flow as it's reporting as net income on its income statement. But even there, there's not a huge differential between real cash profits and the accounting profits Textron reports. All in all, I think Textron is a fine stock selling for a fair price.
