Is The Recovery In Textron Stock Over?

Recently, Textron (NYSE: TXT) announced its restructuring program to reduce operating losses from low demand and uncertainty induced by the Covid-19 pandemic. After granting furlough to 7,000 employees at the Wichita factory in April, the company has planned to further lower the headcount at its simulation & training unit due to order cancellations and a slow recovery in the commercial aviation sector. Despite a 58% rise since the March 23 lows of this year, at the current price of around $33 per share, we believe Textron stock has low upside potential from a shrinking order backlog and tepid air travel demand. While the stock marginally outperformed the S&P500, which moved 34% in recent months, Trefis believes that the stock has reached its near-term potential. Apart from the expected near-term impact of the coronavirus pandemic on the company’s revenues and earnings, we highlight the historical trends in an interactive dashboard Why Textron Stock Declined 40%?

Per the first-quarter report, the company had an order backlog of $9.2 billion including $6.4 billion for Bell helicopters, and $2.8 billion for Textron Aviation and Textron Systems combined. While the company’s order backlog surged by 37% since 2017, the low demand for its Beechcraft and Cessna aircraft has trimmed the segment’s order backlog from $1.7 billion in December ’19 to $1.4 billion in March ’20. Though the aviation and industrial segments face a near-term impact on operations and prospective orders, Textron’s Systems division has been observing revenue contraction in the last few years due to low demand for its marine and land product line. Hence, the company’s total revenues declined by 4% from $14.2 billion in 2017 to $13.6 billion in 2019. However,  the 2-percentage point improvement in adjusted net income margin has supported an EPS growth of 52%.

Due to a negative impact of shrinking top line and declining order backlog, the company’s PE multiple has trended further downward from 11.9 at the end of 2019 to 9.1 at present. Also, we believe the stock is unlikely to see a significant upside after the recent rally.

So what’s the likely trigger and timing for upside for Textron?

As various countries re-open amidst the coronavirus pandemic to kickstart their economies, discretionary spending is likely to observe a slower recovery until a vaccine gets developed and restrictions on population movement are lifted. While growth in travel demand and a rebound in luxury spending can trigger an upside in Textron’s stock, we believe second-quarter results in July will lay down the expectations on its timing. However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to fuel a rise in market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value. Though market sentiment can be fickle, and fresh evidence of an uptick in new cases could spook investors once again.

While Textron faces order declines due to the coronavirus pandemic, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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