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Investment Overview for Textron (NYSE:TXT)

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1. Aviation Is On The Rise Again

Aviation grew by 6% during 2018. The improved performance is primarily a result of a better pricing environment and increased volumes, especially at turboprop. To put this into perspective, in the most recent quarter, the business was able to deliver 48 jets, about two more than last time, and about 47 commercial turboprops, up massively from 33 in the previous year. We expect this momentum to carry through the remainder of the year as well. Solid order growth and improved delivery figures will see revenues at the segment jump modestly.

2. Systems Business Takes A Toll On Overall Revenues

On the negative end of the spectrum, at Systems, top line fell by 20% in 2018. This was mainly due to lower volumes at Weapons & Sensors related to the discontinuance of SFW production late last year. Further, the top line performance was also weighed down as lower TAPV deliveries at Textron Marine & Land Systems took a toll on the sales. That said, earnings in the quarter remained relatively stable in comparison, coming in at $40 million, down from $42 million a year ago.

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Textron is a multi-industry company that designs and manufactures civilian and military helicopters, business jets, turboprop aircraft, piston-engine airplanes, golf cars, off-road and light transportation vehicles, turf care equipment, power tools, and a variety of defense products. The company also provides financing to promote sales of some of its products, including helicopters and airplanes.

Textron conducts its business through five operating segments: Bell commercial and military helicopters, Textron Aviation (which includes Cessna and Beechcraft airplanes' business), Textron Systems (which includes the company's defense system business), Industrial (which includes the company's turf care equipment, golf cars, off-road and light transportation vehicles, and auto component business), and finance (which provides financing to purchasers of Textron products).

The company sells its products directly as well as through a network of independent dealers. For many of its product lines, including Bell helicopters and Cessna and Beechcraft airplanes, the company also provides maintenance, repair and overhaul services.

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Below are key drivers of Textron's value that present opportunities for upside or downside to the current Trefis price estimate for Textron.

• Cessna & Beechcraft Airplanes EBITDA Margin: Cessna & Beechcraft Airplanes EBITDA Margin remained around 15-16% before the financial crisis of 2009. But the segment's margin declined to low single-digits in the aftermath of the crisis, as production rates were cut in response to sudden decline in demand for business jets, turboprops and piston-engine airplanes. Margin remained between 2-6% during 2009-2013 as Cessna's business jet deliveries continued to fall during this period. Positive synergies from the Beechcraft acquisition helped margins increase up to 8.1% and 11.1% in 2014 and 2015, respectively. In 2016 and 2017, however, the growth in margin was also hurt by lower deliveries of larger midsize jets -- the Cessna Latitude and Cessna Longitude. Cessna's margins fell to 8% in 2018. However, if margins are able to rise to 12% in 2019, then there could be a potential upside of about 10% to ${trefisprice}.  


• Bell's Share of The Global Commercial Helicopter Market: Bell manufactures light single- and twin-engine helicopters and medium twin-engine helicopters. The models currently offered by Bell for commercial applications include the 206L-4, 407, 407GX, 412EP/EPI, 429 and Huey II. We estimate Bell's share of the global commercial helicopter market to be around 19% at the end of 2015. However, there was a sharp decline in market share in 2016 on the back of weak oil demand and a global economy. That said, things seem to now be improving with 2017 seeing a market share of 15.6%.
  We anticipate Bell's market share to rise to about 16.3% by the end of Trefis forecast period. If however, Bell is able to raise its market share to 22%, then there could an upside of 10% to the ${trefisprice}.

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The 'Cessna & Beechcraft Airplanes' and the 'Bell Helicopter' divisions together account for approximately 70% of Textron's valuation, as per our estimate.

Textron's leading position as a general aviation airplane manufacturer

Through its Textron Aviation segment, which includes Cessna and Beechcraft airplanes, Textron is one the largest general aviation airplane makers in the world. General aviation airplanes include all airplanes not meant for scheduled commercial service or military purposes. The company has a strong presence in all the three sub-segments of the general aviation market: piston-engine airplanes, turboprops and business jets.

We figure with recovery in demand for business jets, higher demand for piston-engine airplanes from pilot schools, and rising global demand for agricultural turboprop aircraft, Textron could see its airplane sales rise in coming years.

Bell's wide helicopter product portfolio

Bell helicopters is a well established player in the global helicopter market. The company's portfolio has many commercial and military helicopters which will help it maintain its market share in the coming years. In the commercial space, with demand for helicopters from the offshore oil & gas sector rising, Bell's sales could rise. At the same time, Bell's global sales and service network will also help it gain from the rising demand for helicopters from Asia-Pacific and the Middle-East regions.

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Lower airplane shipments could hurt revenues

• With economic recovery from the financial crisis, shipments of general aviation airplanes are steadily rising. These rising airplane shipments are being driven by recovery in demand for business jets (especially large-cabin, long-range jets), steady demand for agricultural turboprops, and strong demand for piston-engine airplanes from flight schools.
• 2017 saw revenues at Aviation stagnate as lower oil prices, and an overall gloomy global economic outlook reduced demand for business jets. That said, we expect this trend to dissipate over 2018, as oil prices see an upward correction.

Rising demand for commercial helicopters and general aviation airplanes from the emerging countries

• The helicopter market saw tough times over the past few quarters as declining oil prices forced companies to ground a substantial amount of its fleet. However, oil prices are definitely recovering now, and we can see the demand at Bell increase significantly.
• Additionally, with rapid economic growth in many countries of the Asia-Pacific region, demand for commercial helicopters, business jets, and turboprops is growing from these countries. Additionally, with rising personal and corporate incomes, demand for light helicopters, which ferry business VIPs, and business jets, which transport senior level corporate executives, is growing.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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