Textron's "Conviction Buy" Kiss From Goldman Sachs

Probably the best performing stock in the S&P today is that of private-jet maker Textron, which received a double whammy of upgrades from taxpayer darlings Morgan Stanley and Goldman Sachs. Yesterday, MS upgraded the stock from an Underweight to an Overweight, passing Neutral, and putting a $25 price target on the stock. Today, Goldman, never too far behind, especially in names in which it is significantly axed in CDS and other OTC products, upgraded the Cessna maker from Neutral to Conviction Buy, with a price target increase from $16 to $23. 

Just what drove the two firms to suddenly see such previously undiscovered value in a company in which sales of its flagship Cessna Citation airplane account for almost 40% of its $10 billion annual revenue (total Aircraft sales accounted for $5.7 billion of 2008 revenue, of which Citations represented 72%)? Perhaps it is the flourishing private jet market now that Vik Pandit can easily go out and buy the much maligned Dassault Mirages that almost cost him his head in January? Hm, maybe not. Is it its "stable" Industrial business which is such an alleged cash cow, that none other than Goldman was hired to sell the division in February according to Debtwire, yet the lack of any subsequent transaction indicated the "chirping" obtained as a response of any and none acquisition interest on behalf of possible buyers. Is it is experienced executive team, which saw the forced departure of CFO Ted French back in February after singlehandedly decimating the company's stock price? Oh wait, it must be all those takeover rumors spreading in April that the company was to be imminently acquired by some shady Saudi concern? Nah, that turned out to be a case of rumor-mongering which ended up costing the source his life.

Well, if not all that, then where will all this pent up value come from? Let's check out the Goldman report:



The following could act as positive catalysts and drive shares higher, 1) TXT’s Analyst Day on Sept. 9, 2) improved Auto production driving upside at Industrial, given that 60% is Auto, 3) business jet data continuing to improve, 4) asset sales or additional liquidity related events could occur by year-end as credit markets keep improving.

A year ago, each of Textron’s businesses were going the wrong way: Corporate profits and the Industrial economy were rolling over, which had negative implications for Cessna and Industrial, Financials were facing severe challenges which had negative implications for TFC, and a leadership change was about to take place in Washington with negative implications for Defense and therefore Bell and Systems.

Today, we see the exact opposite occurring: Corporate profits and the Industrial economy have likely troughed and are turning the corner which should drive improving data and results at Cessna and Industrial. Credit markets and financial conditions are improving, which should drive slower losses at TFC and allow the company to smoothly exit the business over time. And while we remain negative on Defense, we can now see how Bell and Systems are better positioned than other Defense companies under the priorities of the current Administration, and in aggregate can grow in a declining budget environment.


So in essence - yet another strong upgrade based on assumptions of a mean reversion in an economy that is still struggling to define the bottom of what the new normal is, where 10% unemployment will be standard, yet where corporate executives are expected to scrap their existing fleets of Cessnas every 5 years to keep up with the Joneses. And, just for kicks, as it has worked so well with the overall massively squeezed market, Goldman throws a little Hopium in there, as "cancellations are likely to improve going forward."

But hold on a second, wasn't Textron sued less than a month ago for alleged misrepresentation of its backlog? It is good that Goldman has such better visibility into the order book than even the corporate office.

And speaking of the corporate office, it's job has been hard, but not from making planes, but rather from working overtime handingout pink slips. According to a recent presentation, the company fired 50% of its employees, has instituted 7 weeks of furloughs, has closed its Bend, Oregon facility, transferred two other facilities, and has consolidated various leases. Surely, these are the hallmarks of a company that can not wait to get back to the historical trendline, and is aggressively gearing up to do so. If, however, by gearing up you mean firing half the staff, then yes, you are correct. This does not seem to preclude Goldman from believing that the current depressed book-to-bill ratio must be indicative of something being afoot.

So maybe when looking at mean reversion, the chart below is the right one to contemplate: 

And lest we forget, Textron is still the proud owner of that cancer better known as Textron-Financial, its captive financing division, which almost caused the bankruptcy of the firm when its CDS was trading at all time wides last year and virtually everyone had thrown in the towel on the name. But, of course, "credit conditions have improved."

So what are the potential downsides in this trade that seemingly can do no wrong? From Goldman:

Key Risks:

1) a reversal in credit market improvements, 2) a lack of investment at Cessna, 3) the impact of the broader economic environment.

In other words, the things that brought the firm to the edge, are the same that will likely bring it to the edge again, of course if one were to scrap the Hopium, V-shaped recovery expectations and any potential conflicts of interest. Which begs the question, what are the relevant disclosures? We present them below:

Goldman Sachs beneficially owned 1% or more of common equity (excluding positions managed by affiliates and business units not required to be aggregated under US securities law) as of the second most recent month end: Textron Inc. ($15.50)
Goldman Sachs has received compensation for investment banking services in the past 12 months: Textron Inc. ($15.50)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Textron Inc. ($15.50)
Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Textron Inc. ($15.50)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Textron Inc. ($15.50)
Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Textron Inc. ($15.50)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: Textron Inc. ($15.50)
Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Textron Inc. ($15.50)
Goldman Sachs makes a market in the securities or derivatives thereof: Textron Inc. ($15.50)
Goldman Sachs is a specialist in the relevant securities and will at any given time have an inventory position, "long" or "short," and may be on the opposite side of orders executed on the relevant exchange: Textron Inc. ($15.50)
Goldman Sachs holds a position greater than U.S. $15 million (or equivalent) in the debt or debt instruments of: Textron Inc. ($15.50)

But of course, specualtors, pardon, investors are well aware of all these issues as they lap up TXT stock all the way into the stratosphere, where Morgan Stanley and Goldman, will, for whatever reason, be more than happy to see it, and do with it as they see fit.