Arrow-right Camera


Textron lost its way in finance land

Sun., Feb. 28, 2010

From one perspective, Textron (NYSE: TXT), the maker of Bell helicopters and Cessna business jets, is not a bad-looking business. According to its 2009 earnings report, it generated $500 million in manufacturing free cash flow last year.

Textron accomplished this in the face of the fiercest recession in recent memory, one that hobbled sales in its industrial segment and drained away more than 40 percent of Cessna’s revenue stream. Despite these obstacles, Textron still managed to generate cash.

For defense industry investors, the Textron Systems division holds special attraction as the home base for the Shadow UAV. The plane is so popular that the Pakistani government ordered a dozen Shadows to assist its efforts in quelling Taliban activity along the Afghan border.

And yet the Shadow is overshadowed by a dirty little secret: Textron isn’t just a manufacturer; it’s also a banker – and not a very good one. Expecting easy profits from playing a finance game it was ill-skilled to win, Textron got neutered in large part because its finance division flailed in this economy.

The best news is that over the last 12 months, Textron has extricated itself from about 35 percent of its “managed receivables” (read: “poorly managed receivables”) business. Slowly but surely, it’s getting back to what it does well.

Ask the Fool

Q: I see that Warren Buffett’s company, Berkshire Hathaway, just split its B shares 50-to-1. Is that good news? – T.W., Chicago

A: Splits are usually executed by companies that have been doing well, so in that sense they can be viewed positively. But they don’t represent any real change in a stock’s value. Imagine you owned 100 shares of Meteorite Insurance (ticker: HEDSUP), trading at $40 apiece. Then the shares split 2-for-1. You’d suddenly have 200 shares, worth $20 each. In both cases, the total value is $4,000 – it hasn’t changed.

Berkshire’s split is unusual in that it’s 50-for-1, since a single class-B share was trading in the $3,000s pre-split. (The company’s class-A shares were recently trading for more than $100,000 apiece!) Before and after the split, Berkshire operates the same businesses, employs the same people and has the same prospects. Its class-B shares simply have a lower price now.

Q: Which big companies have women in charge? – C.L., Baton Rouge, La.

A: There are more than a dozen women running Fortune 500 companies – but 97 percent of the firms are still run by men. At least the numbers have been rising in recent years, up from just six in 2002. Meet some powerful women: Brenda Barnes, Sara Lee; Carol Bartz, Yahoo!; Angela Braly, WellPoint; Lynn Elsenhans, Sunoco; Susan Ivey, Reynolds American; Andrea Jung, Avon Products; Christina Gold, Western Union; Ellen Kullman, DuPont; Carol Meyrowitz, TJX; Ursula Burns, Xerox; Indra Nooyi, PepsiCo; Irene Rosenfeld, Kraft Foods; Laura Sen, BJ’s Wholesale Club; Patricia Woertz, Archer Daniels Midland. There are many other high-profile women in business, such as FDIC Chair Sheila Bair and Safra Catz, president of Oracle.

My smartest investment

When I was a sophomore in college in 1993, I qualified for a subsidized loan. I wasn’t sure if I should take it, because with scholarships and savings, I would be able to cover my expenses. I did take the loan, and was therefore able to invest my savings in a growth and income mutual fund. Well, by graduation a few years later, my fund had more than doubled, and I was able to repay the loan entirely. – Philip, via e-mail

The Fool Responds: Credit card debt and other high-interest-rate debt should be avoided at all costs. But it can make sense to take low-rate loans to free up money for investments where you expect to earn more. For example, if your loan costs you 4 percent and you hope to earn 8 percent or more in your stocks, you stand a good chance of doing well. Just be sure to factor in the chance of things not going your way. The late 1990s were a booming period for the market. If you use this strategy, you need to have a plan in case your investments fall short.


Click here to comment on this story »