Report

Systematic Ideas - Long Textron (TXT US) & Short ITV (ITV LN) - 28 Jul

New Longs: TXT

New Shorts: ITV LN
Closing Positions: SPG, DRI, OXY, EZJ LN, LYB, RIO LN, AAL LN, NEM: Flip Book Closings: VOD LN, ERICB SS, ORK NO, UA, MKS LN, VOW3 GR, BMW GR
 
Short ITV (ITV LN)
 
ITV has seen their strong cash pile dwindle while their debts have grown steadily over the last few years. The company announced H1 results on 26th July confirming a drop in TV advertising revenue and expecting a further decline in Q3 too. ITV Studios also remained lackluster in spite of benefitting from FX effects.
 
As eyes move away from traditional television and towards Netflix, Amazon, YouTube and Facebook, TV ad budgets will continue to squeeze. This segment still amounts to ~60% of ITV’s revenues and will eventually start to hit hitherto stable margins .
 
The stock trades at a 17% premium to peers on a EV/EBITDA (blended forward) which is toward the upper end of its 5 year range (Fig. 1). While this premium persists the stock should remain vulnerable to declines.
 
Long Textron (TXT US)
 
Textron has strong track record. Its net margins have been steadily rising over the last 5 years and the company has a steady cashflow profile. With Q2 results beating expectations the company looks on track to meet its FCF target of $750 million (6% FCF yield) for 2017.
 
The recent acquisition of Arctic Cat has proven well-timed being a stand out contributor to the Q2 revenue growth and is expected to continue for the rest of this year. The management remains focused on improving margins further and continues to pursue M&A to propel business. Additionally, the increasing US defense budget provides a good opportunity to help the company grow revenues (The authorities account for 25% of revenues).
 
Textron currently trades at a 20% discount to peers on a PE basis which is at the lower end of its 5 year range. The stock has spent close to 8 years moving sideways vs the S&P 500 Index and is now starting to look like it is entering a period of outperformance after this eight year hiatus. So we buy here.
Underlying
ITV
Provider
Deydun
Deydun

Deydun Markets

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