Is The Market Pricing Textron Fairly?

by Trefis Team
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2017 wasn’t a very good year for Textron (NYSE:TXT). In general, the financials in the year were hurt by deteriorating global economic conditions, rising oil prices, and increasing competitive pressures. Right from the start, the company witnessed revenues and earnings coming in rather flat. Specifically, Aviation and Bell saw business stagnate. That said, Industrial and Systems stepped up, and helped drive the top line throughout the year.

In 2018, the company started the year quite strong. However, despite the financials recorded in the quarter, given that the macro economic conditions are yet to stabilize fully, we are still a little skeptical about the company’s growth prospects going forward.

The company’s stock price jumped quite significantly post the last earnings call. As of writing this article, the stock was trading at about $66. However, we feel that investors may have been too quick to rejoice, and in this respect, have created an interactive dashboard, to best elaborate on our reasoning behind our lower valuation of about $58.

In general, Textron derives its revenues from four major sources: Aviation, Bell, Systems, and Industrial. While Industrial continues to help buoy revenues, we expect Bell and Aviation to turn things around going forward, albeit slowly, as Systems looks to lag on sales.

After a rather rough spate over most of 2017, Aviation and Bell recorded revenue increases in the latest quarter. Revenues at Aviation jumped by almost 4%. The rise in sales is primarily attributable to the significant jump in commercial turboprop deliveries. In general, the company managed to deliver 29 commercial turboprops in comparison to the 20 from a year ago. That said, things at Aviation are still hard to judge. While commercial deliveries have shown improvement in the recent past, the segment has still shown consistent declines in year over year revenues, owing primarily to lower military orders. We are yet to see how the biggest segment at the company is going to perform over the remainder of the year.

At Bell, things are quite the same. While sales increased by about 8% year over year on higher military volumes, the results were partially offset by lower commercial revenues. We expect this trend to help boost the top line through most of 2018. That said, it must be noted that commercial volumes at the segment are still hurting, and are expected to do so for some time, potentially offsetting the gains at military. The Q1 results may not be enough to justify the jump in the stock price.

Industrial continues to show marked improvement over the quarters, especially due to the inclusion of Arctic Cat. This buyout has greatly helped Textron expand its existing product portfolio, while helping enhance its footprint in the outdoor recreational and utility market, courtesy of Arctic Cat’s established dealer network. In this respect, in the most recent quarter, the segment recorded revenue increases to the tune of 14%. We expect the segment to continue to grow over the remainder of the year.

At Systems, while revenues have been consistent through most of 2017, Q1 saw its sales decline from $416 million a year ago to $387 million. This decrease in revenue was mainly the product of lower volume at Weapons & Sensors driven down by the discontinuance of SFW production in 2017. We are still to see how this effects things at the segment, but expect to see revenues come in lower or relatively flat in comparison to revenues in the year ago figures through 2018.

Given the reasoning above, we believe that while Textron seems to have turned the corner, at least if the numbers in Q1 are any indication, it is still too early to justify the $66 price it is currently trading at. For this reason, we have decided to maintain our price at a historical high of around $58.

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