VALUATION HIGHLIGHTS

1. Textron Aviation constitutes 48% of the Trefis price estimate for Textron's stock.
2. Bell constitutes 19% of the Trefis price estimate for Textron's stock.
3. Industrial & eAviation constitutes 17% of the Trefis price estimate for Textron's stock.

WHAT HAS CHANGED?

TXT Stock Performance

TXT stock has seen extremely strong gains of 80% from levels of $50 in early January 2021 to around $90 now (end of February 2024), vs. an increase of about 35% for the S&P 500 over this roughly three-year period.

However, the increase in TXT stock has been far from consistent. Returns for the stock were 60% in 2021, -8% in 2022, and 14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that TXT underperformed the S&P in 2023.

Q4 2023 Performance

Textron reported manufacturing revenue of $3.9 billion in Q4 2023, reflecting a 7% y-o-y rise, primarily driven by the Bell segment, up 31%.

The company reported earnings of $1.60 per share, compared to $1.23 in the prior-year quarter. For the full year of 2024, the company expects its earnings to fall between $5.62 and $5.82.

Recovery from the pandemic

The shares of Textron are trading over 4x the levels observed during March 2020 when markets made a bottom. This growth is assisted by the strong order backlog of the Aviation segment. Notably, the Aviation segment is likely to observe steady growth in the near term. The segment contributes 40% of total revenues and 35% of total profits.

Textron's competitor, Bombardier, is a leading manufacturer of business jets with its product portfolio segregated across three brands — Learjet, Challenger, and Global. Bombardier primarily sells medium and large aircraft, with unit costs ranging from $20 million to $75 million. On the contrary, Textron caters to the light aircraft market with unit costs lower than $30 million.

BUSINESS SUMMARY

Textron is a multi-industry company that designs and manufactures civilian and military helicopters, business jets, turboprop aircraft, piston-engine airplanes, golf carts, 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 carts, 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.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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

• Textron Aviation EBITDA Margin: Textron Aviation EBITDA Margin increased from 9.2% in 2017 to 14.7% in 2022. We forecast the metric to rise to 17% by the end of our review period. However, if margins can rise to over 20% by the end of the forecast period, then there could be a potential upside of about 10% to Trefis price estimate for Textron's stock.

SOURCES OF VALUE

The Textron Aviation and 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 of 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 three sub-segments of the general aviation market: piston-engine airplanes, turboprops, and business jets.

We believe with a 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.

KEY TRENDS

Lower airplane shipments could hurt revenues

• With economic growth slowing down and fears of recession mean that the shipments of general aviation airplanes could face headwinds in the near term.

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

• The helicopter market saw tough times in 2020 due to the pandemic, which forced companies to ground a substantial amount of their fleet. However, the economies have recovered over recent years, and we can see the demand for Bell helicopters increase.
• Additionally, with rapid economic growth in many countries of the Asia-Pacific region, demand for commercial helicopters, business jets, and turboprops is growing. 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.