Textron poised to break out as U.S. economy rebounds

The recession led to many companies postponing capital equipment purchases. There’s now a record amount of cash sitting on balance sheets, and as purse strings start loosening, Textron (NYSE: TXT) stands to benefit.

The company has four major production divisions: Cessna (business jets), Bell (commercial and military helicopters), Textron Systems (military hardware) and Industrial (auto parts and specialized vehicles such as golf carts). Three divisions have begun to see sales rising, while Cessna expects a turnaround soon. The market hasn’t quite caught on to this yet, judging from the stock’s low valuation.

Textron has managed to grow free cash flow by an average of 12 percent a year for the past five years and should continue to grow.

So what could go wrong? The economic recovery could stall, but Textron’s customers are way beyond when they would normally replace and upgrade. That can only be delayed so much.

And to sweeten the pot for Cessna, Textron has introduced a new jet that’s more fuel efficient, appealing to companies worried about costs. Defense Department cutbacks could also hurt, but our military remains very busy.

Given the turnaround in sales, the growing interest in business jets, opportunities tied to automakers and the company’s cost-cutting, Textron is looking rather attractive.

Ask the Fool

Q: When I find a rapidly growing company, what factors should I examine before deciding whether to invest in it? – T.J., Bloomington, Ind.

A: There are many considerations. Ideally, you want to see competitive advantages, such as a strong reputation, patents, or economies of scale.

On the balance sheet, if inventory levels or accounts receivable are growing faster than sales, that’s a red flag, as is steep or quickly growing debt. Two companies performing similarly on the income statement can look very different on the balance sheet.

Examine the statement of cash flows to see how the firm’s cash is being generated and how much investment is required to create earnings. Generally, you want to see most cash coming from ongoing operations – the stuff produced and sold – and not from the issuance of debt or stock or the sale of property.

Also look at the company’s profit margins (gross, operating and net). Higher margins suggest that a firm has a proprietary brand or technology it can charge more for. They often indicate a higher-quality company.

You could also examine return on equity and return on assets, comparing a company with its competitors. See which firm is generating more dollars of earnings for each dollar of capital invested in the business. Check previous years’ numbers to see whether the trends are positive.

Learn more about how to evaluate companies at www.fool.com and www.morningstar.com.

Q: What good books cover the history of the stock market? – A.G., Abilene, Texas

A: Check out “Learn to Earn” by Peter Lynch (Simon & Schuster, $15), Peter Bernstein’s “Capital Ideas: The Improbable Origins of Modern Wall Street” (Wiley, $19), and “Devil Take the Hindmost” by Edward Chancellor (Plume, $17).

My dumbest investment

In 2008, I got two broadcast faxes touting “can’t miss” investments. I bought 300 shares of the first stock, at $3.21 each, and 1,750 shares of the second, at $1.69. Talk about dumb. I had no idea what I was doing and no business risking nearly $4,000 of my retirement savings. Both stocks were low, so I thought they would surely go up. In fact, both went down to nothing in short order. I didn’t have the good sense to sell on the way down, either, afraid of missing a rebound.

I left them in my portfolio and there they stay, daily reminders of how dangerous a lack of knowledge and trusted investment information can be. I have since made other, wiser investments and made up most of my losses, but the sting remains. – Lori, Bridgeport, W.Va.

The Fool responds: If a stock is being hawked via fax spamming, it’s probably not a high-quality investment. Stocks trading for less than $5 per share are penny stocks. They can be particularly volatile and risky, tied to shaky companies and easily manipulated by con artists.