Textron (TXT): Top Pick for 2016 - Cowen

Cowen analyst, Cai von Rumohr, highlighted Textron (NYSE: TXT) as his favorite pick going into 2016 and discusses why he is above consensus for earnings. The firm reiterated an Outperform rating and raised their price target to $53 from $52.

TXT is a business aviation play (~38% of EBIT), driven by new product momentum, industry consolidation, and cyclical recovery once the economy improves. It's also a broad defense play (~40% of EBIT), going into a Presidential election year when defense stocks have tended to outperform. Execution has been good, and there's cash deployment upside.

EPS is likely to ramp to $3.60 in 2017 (18% 2016-17 CGR) as Latitude/Longitude bizjets build; and the "clean-sheet" Hemisphere, TXT's 1st large bizjet entry, extends visibility to 2020.

While perceived as a cyclical bizjet play, TXT is mainly a new product story as Cessna's three new bizjets & the Relentless helicopter are steps up into large market segments, in which it has little/no share. This is key since bizjet demand varies by segments, and is driven by new products, brand, & geography, all of which currently are in Cessna's favor.

TXT also is a bizjet consolidator, having acquired Hawker Beechcraft and likely to gain share from Lear, which cancelled its only new product. While overall bizjet demand is lackluster, the pre-owned-for-sale ratio is at an all-time low of ~9% and Cessna's pre-owned prices have stabilized, suggesting limited downside to its legacy products.

The analyst's 2016-17 EPS estimates exceed consensus by ~10% on higher sales by 2-4%. This assumes that

1) legacy bizjet deliveries hold at flat

2) incremental bizjet margins are 25%+

3) Systems margins rise with TAPV production,

4) Bell's profitability holds about flat.

For an analyst ratings summary and ratings history on Textron click here. For more ratings news on Textron click here.

Shares of Textron closed at $41.47 yesterday.

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