Editors Note:

The aerospace-defense sector is hot and stocks are breaking out to new highs. Textron is rumored to be a potential acquisition target.



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TXT - Textron - Company Profile

Textron Inc. operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through five segments: Textron Aviation, Bell, Textron Systems, Industrial, and Finance. The Textron Aviation segment manufactures and sells business jets, turboprop aircraft, piston engine aircraft, and military trainer and defense aircraft; and commercial parts, as well as provides maintenance, inspection, and repair services. The Bell segment provides military and commercial helicopters, tiltrotor aircraft, and related spare parts and services. The Textron Systems segment produces unmanned aircraft systems; smart weapons, airborne and ground-based sensors and surveillance systems, and protection systems; armored vehicles, turrets, and related subsystems, as well as marine craft; test equipment and electronic warfare test, and training solutions; piston aircraft engines; and intelligence software solutions. This segment also designs, develops, manufactures, installs, and maintains full flight simulators, as well as offers training services. The Industrial segment offers blow-molded plastic fuel systems, windshield and headlamp washer systems, catalytic reduction systems, and engine camshafts, as well as plastic bottles and containers; golf cars, off-road utility and light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment, and turf-care vehicles; and powered equipment, electrical test and measurement instruments, mechanical and hydraulic tools, cable connectors, fiber optic assemblies, underground and aerial transmission and distribution products, and power utility products used in the construction, maintenance, telecommunications, data communications, electrical, utility, and plumbing industries. The Finance segment provides financing to purchase new and pre-owned aircraft and helicopters. Textron Inc. was founded in 1923 and is headquartered in Providence, Rhode Island. Company description from FinViz.com

Expected earnings January 31st.

With Airbus acquiring a stake in Bombardier, Boeing a stake in Embraer, Honeywell, United Technologies, Rockwell Collins, etc, all circling each other like sharks around a wounded whale, Textron is a potential acquisition candidate.

There are no formal rumors but options activity is huge. On Friday there were 5,400 of the Jan $55/$60 calls traded with the $55 calls at $3.50. There were 9,500 of the Feb $60 calls traded at $1.70 against an open interest of 261 contracts.

Textron has lagged the other defense contractors because they are in a contract period where capex is high but the eventual income has not yet appeared.

Last week FedEx (FDX) announced an order to buy 50 of Textron's Cessna SkyCourier 408 aircraft with an option to increase the order to 100. FedEx worked closely with Textron to design the plane for package delivery to small and medium sized markets.

The Textron aviation chief said Amazon was another potential customer because the need to ship express packages to addresses outside major cities was rapidly growing. Textron produces Cessna, Beechcraft and Hawker business jets.

Textron/Bell/Boeing produces the V-22 Osprey aircraft. They just achieved first flight on the new V-280 Valor, which is a new generation tiltrotor aircraft like the Osprey. Bell, as in Bell Helicopter, is the division producing the V-280. The aircraft has twice the speed and range of a conventional helicopter and carries a much larger payload.

The company has so many projects in the works they are right on the edge of a new chapter in their growth. With the $700 billion defense program that passed in September, they will be getting a wide variety of new orders.

There is no way to know if somebody is about to make any offer but the dramatic surge in option volume is typically a sign or rumors making the rounds.

I am recommending the March option to retain premium longer but we will probably exit before earnings on Jan 31st.

Buy Mar $60 Call, currently $2.15, stop loss $56.45.


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