Optimism In Textron Stock A Trigger For Boeing?

BA: The Boeing Company logo
The Boeing Company

The shares of Textron (NYSE: TXT) observed a strong rally in 2021 largely due to a surge in the company’s Aviation segment’s order backlog, whereas the shares of Boeing (NYSE: BA) have remained almost level. Textron designs and manufactures civilian and military helicopters and business jets. Considering the uptick, Trefis believes that TXT stock has reached its near-term potential. Boeing is the leading manufacturer of 100+ seat aircraft for the global commercial airplane industry and has a strong presence in the defense contracting business. The $60 billion drop in Boeing’s market capitalization from pre-pandemic levels is significantly more than the $22 billion of operating cash burn (largely due to rise in inventories) during the same period. Thus, the easing of inventory levels and resumption of MAX production are key triggers for a sizable upside in Boeing stock. Our interactive dashboard, The Boeing Company vs. Textron: Industry Competitors, But The Boeing Company Is A Better Bet, highlights a slew of factors such as historical revenue growth, returns, and valuation multiples.

1. Revenue Growth

Boeing’s growth was stronger than Textron’s before the MAX crisis with Boeing’s revenues growing at an average rate of 4% from $93 billion in 2016 to $101 billion in 2018. Whereas Textron’s revenues have remained relatively flat at $14 billion due to a slowdown in private jet demand. Travel restrictions took a toll on both companies’ top-line with Boeing and Textron reporting a 24% and 15% contraction in 2020, respectively. In 2021, a gradual top line recovery was reported by Textron whereas Boeing faced production hurdles from the pandemic.

  • Boeing’s three operating segments, Commercial Airplanes, Defense, and Global Services contribute 57%, 26%, and 17% of total revenues, respectively. Despite a steep decline in the Commercial Aviation segment due to the grounding of MAX and the pandemic, the Defense & Space segment has been reporting promising numbers over the years. Per recent filings, the company’s order backlog still stands tall at $377 billion.
  • Textron’s four operating segments, Aviation, Bell, Systems, and Industrial contribute 38%, 24%, 10%, and 28% of the total revenues, respectively. The company’s Aviation segment observed production hiccups and order cancellations due to tepid travel demand and a fall in discretionary spending during the pandemic. In recent quarters, the Aviation segment has reported a 156% surge in order backlog from $1.6 billion in Q4 2020 to $4.1 billion in Q3 2021. However, the total order backlog has observed only a 6% growth over the same period.
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2. Returns (Profits)

Boeing and Textron have been reporting comparable operating and net margins in recent years.

  • Before the MAX crisis, Boeing’s three operating segments, Commercial Airplanes, Defense, and Global Services reported an operating margin of 14%, 7%, and 15%, respectively. Due to the suspension of MAX’s production, the Defense segment has been supporting earnings the past two years.
  • In 2020, Textron’s Aviation, Bell, Systems, and Industrial segment reported an operating margin of 8%, 13%, 11%, and 6%, respectively. While the Bell segment sustained earnings during the crisis, the growing private jet demand is expected to boost the Aviation segment’s profits in the coming years.
  • Both companies have been following a similar shareholder policy by consistently returning capital as dividends and share buybacks. (related: Air Travel Demand To Push Boeing Stock Higher?)

3. Risk

Per recent filings, Boeing and Textron reported $58 billion and $3.2 billion of long-term debt, respectively. Boeing has a long-term debt to asset ratio of 41% compared to Textron’s 18%. Thus, Boeing stock is a riskier pick from the perspective of financial leverage.

  • Higher financial leverage coupled with continued revenue growth is responsible for generating surplus equity returns. However, a decline weighs on earnings due to high interest expenses.
  • Interestingly, Boeing inventories observed a $15 billion jump from $62.5 billion in 2018 to $78 billion in 2020. As the balance sheet holds $16 billion of cash and short-term investments, a major portion of the $58 billion long-term debt is due to high inventory levels.
  • Notably, Textron’s stable top line is likely to be a drag on earnings and shareholder returns.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Feb 2022
MTD [1]
YTD [1]
Total [2]
BA Return 9% 9% 41%
TXT Return 6% -6% 49%
S&P 500 Return -1% -6% 100%
Trefis MS Portfolio Return 2% -8% 264%

[1] Month-to-date and year-to-date as of 2/16/2022
[2] Cumulative total returns since the end of 2016

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