Textron Soars on Cessna Wings

Commercial airlines may be floundering, but the corporate jet market seems to be taking off. That may help to explain why shares of Textron (TXT - commentary - Cramer's Take), owner of Cessna, the world's largest maker of business jets, are outperforming the market overall as well as its peer group. The stock is up 8% so far this year, far better than the S&P 500, which is essentially flat, and ahead of the 5% return on the Dow Jones Diversified Industrials index.

Because the long overdue upturn in the late-cycle business jet market is just starting to materialize, Textron's shares could continue their ascent. The company's earnings and share price are still nowhere near their prior peak levels of the late 1990s (more than $4 and $80, respectively), and based on historical performance, the company's operating margins still have a lot of upside as well. At a recent $62.93, Textron shares are trading at a P/E ratio of about 15.5 on next year's consensus estimate of $3.93 per share, slightly below the average P/E of 16 on its diversified industrial peer group. So despite the stock's good performance this year, the shares are still reasonably priced.

When Textron reports its third-quarter earnings on Oct. 21, management likely will provide more evidence that the business jet market is in recovery. Analysts are looking for earnings per share of 77 cents. For one thing, corporate profits are rebounding strongly, and were up 18.4% year over year in the second quarter, meaning businesses are finally able, for the first time in a long time, to make purchases on big-ticket items like corporate jets. There are a number of factors that continue to make businesses favor travel via corporate jets over commercial airlines, ranging from terrorism to travel delays. Plus, the uncertainty and dire financial condition of the big carriers adds to the trepidation.

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Odette Galli is a freelance columnist for RealMoney.com. She has been a writer at SmartMoney Magazine and a senior manager at Ark Asset Management, where she co-managed $3 billion in institutional assets. In addition, Galli was a senior vice president at J & W Seligman. At the time of publication, she had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. She welcomes your feedback and invites you to send your comments to [e-mail].