A Beechcraft King Air turboprop aircraft lines the assembly line at Textron Aviation’s production facility on Thursday, June 7, 2018, in Wichita, Kansas.
Luke Charette | Bloomberg | Getty Images
Is there anything flashier than this? space x IPO?
Of course, who doesn’t like going to the moon and beyond? But if you’re looking for something a little more realistic, there’s one stock investors are overlooking. Textron That’s exactly what it is. It’s a stealth play with solid technicals, fundamentals, and trading at a deep discount compared to its defensive peers.
Despite widespread economic headwinds, Textron’s sales and profits have consistently increased. The maker of Bell Helicopters, Cessna airplanes and even golf carts released a first-quarter report that beat consensus by more than 11%, and its stock rebounded on paper. Still, despite the S&P’s rise, the stock is currently trading slightly lower than it was before the report was released. Despite the obvious operational momentum, the price of TXT continues to explode on the street. It trades at a forward P/E ratio of just 13.7x, well below the five-year average of 18x.
Why the big discount? The market suffers from a bad case of risk mispricing. Yes, Congress is facing mounting debt pressures, which is contributing to the perceived risk to Textron, Embraer, and Bombardier’s aircraft equipment programs. However, the geopolitical demand factor for defense spending has not subsided. Textron is aggressively shedding low-margin industrial sectors to become a pure aerospace and defense powerhouse, freeing up a $19 billion backlog in the process.
While the chart isn’t exhilarating, TXT continues to trade above its 150-day moving average (with FCF yield expected to be around 4.65% in FY27) while generating significant free cash flow.
To capture the potential upside, recognizing that 1) the overall market is a little overvalued and 2) implied volatility (how options traders view option prices) is slightly higher, I would express this view with a risk-defined bullish bet rather than buying stocks.
At today’s mid-market price, you can buy the September 95/110 call spread for about $4.65.
trade
Selling a $110 call against a long $95 strike lowers the purchase price and reduces the effects of time decay (also known as “theta”). Clear risk, lower cost base…a strategy that doesn’t require tomorrow’s moves, giving the market time to revalue the stock.
My guess is that the market will eventually notice Textron, but by using the spread, I defined the risk of a bullish bet in case it doesn’t notice.
