And It Can't Count on a Bailout

The Obama portfolio, assembled by our compadres at The Big Money, is a set of companies seemingly in tune with the vibe and zeitgeist of the 44th president. Which got me wondering: What would the un-Obama portfolio—a set of companies entirely out of step with prevailing moods and trends—look like? The charter member might be a diversified conglomerate, with a name out of a David Baldacci thriller, whose largest unit manufactures private propeller planes and jets that cater to fat-cat CEOs and hedge-fund magnates. Its second-largest unit might make expensive helicopters for the Pentagon, while other divisions would produce defense- and homeland-security-related hardware, and still others would make products catering to the leisure class, like golf carts. Oh, and it might tap into the capital markets to create a business to lend cash to customers buying all these big-ticket items.

In other words, it might be Textron.

Textron's businesses include Cessna, a large manufacturer of private planes (40 percent of revenues); Bell Helicopter, which makes the UH-1Y and AH-1Z helicopters for the Pentagon (20 percent of revenues); Textron Systems, a clutch of defense contractors (15 percent of revenues); and an industrial unit that produces things like E-Z-GO golf carts and turf maintenance vehicles (20 percent). The finance unit accounts for the rest.

From 2002 to 2006, given the macroeconomic climate and the power structure in Washington, this was a great set of businesses. Money was cheap, the defense budget was growing, and your customers didn't particularly care how much anything cost. Tax policy and the economic culture smiled upon magnates who jetted around the country, played golf, and rented industrial-scale earth-moving machines to landscape their third, fourth, and fifth homes. As this long-term chart shows, Textron thrived in what I've dubbed the Dumb Money Era.

But the Dumb Money culture began to unwind in 2007, about when Barack Obama stepped onto the national stage. And since then, it's been pretty much all downhill for Textron and its stock, which is off more than 80 percent in the last year. The company now seems almost perfectly suited to get seriously hammered in the post-Bush era. It's diversified, yes, but in exactly the wrong ways. The diversification functions more as deadweight than ballast.

Let us count the ways. Although Cessna just received some unwanted free publicity courtesy of this nutcase, the private aviation business is in the toilet—economically and culturally. In the wake of the bailouts of financial-services and auto companies, private jets owned or chartered by corporations have become a symbol of everything that went wrong. To fly a private plane is to practically announce that you just don't get it. A huge number of high-fliers have been grounded, including accused Madoff-manqué Allen Stanford, who was shocked to discover that ordinary travelers have to remove their shoes when passing through security. In the fourth quarter of 2008, profits at Cessna, Textron's biggest unit, were off 31 percent from 2007. In late January, the company projected (see Page 6) that deliveries of Citation jets would fall 20 percent in 2009, to 375. But that proved to be too optimistic. Last week, Textron announced it would further reduce manufacturing production this year at Cessna.

While defense spending, contrary to most reports, is continuing to rise, Defense Secretary Robert Gates signaled Monday that the Obama Pentagon would do business differently. Gates called for shutting down some expensive programs, like the F-22 fighter (on which Textron is a subcontractor), relying less on contractors and generally getting tougher on outside providers.

There's more. Textron's industrial business units, which lost money in the fourth quarter of 2008, are expecting a punk 2009, too. Golf courses and resort communities have been hit hard in this downturn. Middle-aged men had more free time last year, but the number of rounds of golf played fell in 2008. And fewer people are buying souped-up lawnmowers. As for the lending business, don't ask. Like so many other institutions, Textron is now thinking better of the practice of extending credit freely to customers.

In the fourth quarter of 2008, Textron posted a $209 million net loss, compared with a $256 million profit in the fourth quarter of 2007. In January, it said it expects revenues to fall 12 percent this year, to about $12.5 billion. Last week it sold off a unit to raise a few hundred million dollars.

Lots of companies have been hurt by financial leverage—tying the company's fortunes to the fortunes of the debt markets. Leverage allows companies to rise higher during good times and causes them to fall harder during tough times. Textron has taken its lumps in finance. But its experience shows that excessive reliance on political and cultural leverage can be just as dangerous.