Time To Sell Textron Stock and Buy Lockheed?

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The shares of Textron Inc. (NYSE: TXT) have recovered to pre-Covid levels despite the company reporting weak third-quarter numbers and a grim near-term outlook. As Textron stock gained 50% since November, the shares of its competitor Lockheed Martin (NYSE: LMT) have trended downwards primarily due to the uncertainty surrounding the defense bill, which was later overturned by the Senate in January. Considering Textron’s high exposure to the slow-paced commercial airline industry, Trefis believes that Textron stock has reached its near-term potential. Moreover, three-quarters of Lockheed Martin’s business comes from the U.S. government, which has regularly increased defense spending since 2015. Despite the uncertainty surrounding the defense budget, Lockheed Martin’s strong order backlog of $150 billion and multi-year government contracts secure long-term shareholder returns. We compare a slew of factors such as historical revenue growth, returns, and risk in an interactive dashboard analysis, TXT vs. LMT: Is TXT Stock Appropriately Valued Compared to LMT?

  1. Revenue Growth

Lockheed Martin’s growth has been much stronger than Textron’s over the last three years, with Lockheed Martin’s Revenue expanding at an average rate of 8% per year from $47 billion in 2016 to $60 billion in 2019, versus Textron’s Revenue which remained almost flat over the same period at $14 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 has been observing production hiccups and order cancellations, due to tepid travel demand and a fall in discretionary spending. Per Q3 2020 filings, the Aviation segment observed 34% (y-o-y) contraction and delivered just 25 jets compared to 45 last year.
  • On the contrary, Lockheed Martin delivered robust earnings even during the crisis with Aeronautics and Missiles & Fire Control divisions reporting promising numbers.
  • Interestingly, LMT’s order backlog increased by $7 billion from $144 billion in December 2019 to $150 billion in September 2020.

  1. Returns (Profits)
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Lockheed’s operating profit margin has consistently remained 5-percentage point higher than Textron – implying superior returns for investors in the form of dividends and share repurchases.

  • In 2019, LMT’s Aeronautics, Missiles & Fire Control, Rotary & Mission Systems, and Space segments reported an operating margin of 10%, 14%, 9%, and 11%, respectively. Moreover, the Aeronautics segment has been key to earnings growth in recent years.
  • On the other hand, Textron’s Aviation, Bell, Systems, and Industrial segment reported an operating margin of 8%, 13%, 11%, and 6%, respectively. While the Bell segment has been sustaining earnings during the crisis, the slowdown in Aviation business remains a near-term concern.
  • Textron has furloughed employees at its Wichita factory and is poised to sell its non-U.S. simulation business to CAE. Whereas, Lockheed Martin was on a hiring spree amid the pandemic.
  1. Risk

Per Q3 2020 filings, Lockheed Martin and Textron reported $12 billion and $3.2 billion of long-term debt on their balance sheet, respectively. LMT has a significantly higher debt to asset ratio compared to Textron, but the U.S. government contributes a significantly higher share of LMT’s topline – indicating a lower risk of competitive rivalry.

  • Higher financial leverage coupled with continued revenue growth is responsible for generating surplus equity returns. Since 2016, Lockheed Martin’s Revenues have increased by 27%, and its stock value has appreciated by 57%.
  • Since 2016, Textron’s Revenues have remained almost flat and its stock value declined by 8.6%.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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