Could Cuts In Government Spending Push Textron’s Stock To $10?

With the U.S. government increasing healthcare spending to combat the coronavirus pandemic, it is very likely that the defense budget will see deep cuts over the foreseeable future. The coronavirus outbreak has hurt the demand for a spew of products and services globally, resulting in a reallocation of government funds towards essential human needs. And even after the current crisis passes, the significant fiscal deficit it will leave in its wake will very likely force the government to tighten its purse strings. Textron (NYSE: TXT) first-quarter earnings on April 30 will confirm the expected declines in military spending by the U.S. government and its commercial customers.

Geographically, the United States and Europe contribute 65% and 15% of Textron’s total revenues, respectively, and both regions are in deep financial distress. Due to a sharp drop in consumer discretionary spending, Textron could observe order cancellations from its commercial customers as well as the U.S. Government. Our dashboard shows the impact of a 30% decline in the company’s revenues for the year to $10 billion – resulting in Textron’s stock price falling to $10 or lower from around $30 now. Such a scenario isn’t impossible to imagine keeping in mind the fact that the stock fell to below $5 at the peak of the 2008 recession.

#1. Textron’s Total Revenues could decline to $10 billion for FY2020, down from $13.6 billion in FY2019, comparable to the order backlog reported in its 10-K filings

Textron reported $13.6 billion in Total Revenues for FY2019 across five operating segments.

• Textron Aviation: $5.2 billion in FY2019 (38% of Total Revenues). This segment manufactures, sells, and services Beechcraft and Cessna aircraft, and services the Hawker brand of business jets.
• Bell: $3.2 billion in FY2019 (24% of Total Revenues). This segment supplies advanced military helicopters and services to the U.S. government and other countries.
• Textron Systems: $1.3 billion in FY2019 (10% of Total Revenues). This segment provides innovative solutions such as unmanned and marine systems for defense and general aviation purposes.
• Industrial: $3.8 billion in FY2019 (28% of Total Revenues). This segment provides fuel systems and specialized vehicles such as utility vehicles and aviation ground support equipment.
• Finance: $66 million in FY2019 (0.5% of Total Revenues). This segment provides financing to customers of Textron products and services.

#2. This would imply a $10 price estimate for Textron stock

• Textron stock could fall to levels of $10 if the P/S multiple declines to about 0.25x with the total sales for the year falling to $10 billion.
• A reduction in margins and the likely prospects of orders from the U.S. government as well as private clients shrinking considerably over the next several quarters will drag down the P/S multiple – especially after Q1 2020 results are announced and the company details expectations.
• Textron’s P/S multiple has seen sharp declines in the past. For instance, over the Great Recession, Textron’s P/S declined from 1.5x at the end of 2007 to 0.25x in 2008.
• A P/S multiple of 0.25x for Textron’s stock, hence, looks plausible given current market conditions.

Textron granted a furlough to 7,000 employees at its Wichita factory, where it manufactures Cessna, Beechcraft and Hawker planes, to contain the spread of coronavirus amongst workers. With the total number of cases reaching a million mark in the U.S., the coronavirus outbreak is expected to weigh on businesses across industries for at least a couple of months more. Our dashboard forecasting US COVID-19 cases with cross-country comparisons lays the groundwork for the expected recovery time-frame and spread.

Textron isn’t the only company that could see its shares take a significant hit in the wake of the coronavirus outbreak. Its peer Boeing is also in a perilous situation, with its stock potentially shrinking 70% to $60.

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