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First gold collapsed. Then premium cupcakes. Now corporate jets. Coke dealers and Dubai real estate brokers: you are officially on notice.
On Wednesday, Textron, maker of Cessna aircraft, reduced its 2013 outlook for business jet deliveries, foreseeing a decline from 2012, and brought down its earnings guidance by almost a 10th. The stock fell by 13 per cent. The depth of the guidance cut, and the reaction, might seem puzzling. Cessna accounted for a quarter of Textron's revenue last year, but only about 7 per cent of its segment profits (the company also makes helicopters and drones, among other things).
Part of the explanation is the high operating leverage in manufacturing aircraft: a little sales growth can mean a big jump in profit. Equally important, resurgence at Cessna has been long awaited, and is a key part of any bullish long-term view of Textron. The business jet market, as JPMorgan has shown, was historically correlated with corporate profits, but jet sales have not come back as corporate earnings have boomed since the financial crisis.
Cessna sold $5.6-billion (U.S.) in aircraft in 2008; it sold $3.1-billion worth in 2012. The temptation to put 2008-like Cessna revenue figure into a Textron earnings model may have been difficult for analysts to resist. Now, however, 2008 looks farther away than ever.
The corporate jet is a symbol of excess some companies may be leery of, and the recent surge in corporate profits has less to do with growth than spending less on things like aircraft. Worse, the profit cycle appears to be turning over. Is there any reason for hope at Cessna? A key question is whether it can go where the growth is. Roughly 85 of per cent of Cessna sales come from North America and Europe. If giddy corporate spending is going to blossom again soon, it is unlikely to happen there.