Textron Stock: Should You Ride The Momentum?

by Trefis Team
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[Updated 2021/09/20]

The shares of Textron (NYSE: TXT) are currently trading at 40% above pre-Covid levels and are almost comparable to the highs observed in September 2019. The recent surge in the stock price has been driven by a quick recovery of the company’s Aviation segment during the second quarter. Notably, the Aviation segment’s Q2 2021 revenues stand taller than Q2 2019 along with a larger order backlog. Does that make Textron stock a good pick for strong gains?

Considering overall business jet demand (as reported by Bombardier), Textron’s product portfolio, and historical valuation multiples, Trefis believes that investors are too optimistic about Textron stock. We estimate Textron’s Valuation to be $54 per share, which is about 20% below its current market price.

Demand expectations as reported by Bombardier

Bombardier is a leading manufacturer of business jets with its product portfolio segregated across three brands – Learjet, Challenger, and Global. The company primarily sells medium and large aircraft with unit costs ranging from $20 million to $75 million. On the contrary, Textron only caters to the light aircraft market with unit costs lower than $30 million.

Per Bombardier’s investor day presentation, medium & large aircraft sales account for 60% of total industry deliveries. After observing a 20% contraction in 2020, the total industry deliveries are likely to grow at a slow pace in the coming years. Moreover, the total industry revenues are likely to reach 2019 levels by 2024.

[Updated 2021/04/30] – Are Investors Too Optimistic On Textron Stock?

After gaining 37% this year, the shares of Textron (NYSE: TXT) have surpassed pre-Covid levels despite an ongoing slump in the aviation industry. The company’s Aviation segment, which contributes almost 40% of total revenues, observed a 23% contraction in 2020.  In the recent earnings released, the company’s Aviation segment reported a contraction, as the pandemic weighed on business and international travel demand. Textron’s four operating segments, Aviation, Bell, Systems, and Industrial contribute 38%, 24%, 10%, and 28% of the total revenues, respectively. Similar to last year, the Bell segment remained the key revenue and earnings contributor supported by strong demand for H-1 and V-22 series aircraft by the U.S. government. Based on a high current P/S multiple and just 2% growth in order backlog from $9.5 billion in Q4 2020 to $9.7 billion in Q1 2021, Trefis believes that the stock price is stretched. Our interactive dashboard highlights the historical trends in Textron’s revenues, earnings, and stock price, Buy Or Fear Textron Stock?

[Updated 2021/03/12] – Buy Axon and Sell Textron To Enhance Your Defense Portfolio

As the shares of Textron (NYSE: TXT) and other defense contractors recover to pre-Covid levels, the shares of Axon Enterprise (NASDAQ: AXON), manufacturer of the popular Taser gun, have been rallying since February 2020. Considering the strong revenue growth and huge order backlog, Trefis believes that Axon stock is a good pick to enhance the Defense portfolio. As Textron has high exposure to the slow-paced commercial airline industry, its order backlog observed a 3% contraction due to the pandemic. Along with the popular TASER gun, Axon provides related security solutions to police, federal agencies, courts, security firms, and commercial enterprises. With a mission to obsolete the use of bullets, reduce social conflict, and assist the judicial system, the company’s products have been observing heightened demand even during the pandemic. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, TXT vs. AXON: Is AXON A Better Pick Over Textron?

1. Revenue Growth

Axon’s growth has been much stronger than Textron’s over the last three years, with Axon’s revenue expanding at an average rate of 33% per year from $344 million in 2017 to $681 million in 2020. TXT’s revenues have remained relatively flat at $14 billion in the past few years but due to a slowdown in the commercial aviation business, TXT observed a 15% contraction in 2020.

  • Axon’s two operating segments, Taser and Sensors contribute 54% and 46% of the total revenues, respectively. The company provides the popular TASER gun and related security solutions to police, federal agencies, courts, security firms, and commercial enterprises. With a mission to obsolete the use of bullets, reduce social conflict, and assist the justice system, the company’s products have been observing strong demand with a total order backlog of $1.5 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 annual filings, the Aviation segment observed 23% (y-o-y) contraction and delivered 132 jets in 2020 compared to 206 in 2019. More so, the company’s order backlog observed a 3% contraction from $9.8 billion in 2019 to $9.5 billion in 2020.

2. Returns (Profits)

As both companies have different product lines, therefore operating profit margin remains skewed due to a separate asset base. Thus, we compare the operating cash flow of both companies. In 2019, Axon generated $65 million of operating cash with $681 million of total revenues – implying an operating cash flow margin of 9.5%. Whereas Textron reported $13 billion of total revenues and $1 billion of operating cash flow with a margin of 7.6%.

  • Importantly, both companies have nearly similar cash generation capabilities. However, Axon has been heavily investing in its business while Textron has focused on returning capital to shareholders (dividends and share repurchases).
  • Axon’s capital expenditure has increased by 552% from $11.2 million in 2018 to $73 million in 2020 to enhance capacity and build new office facilities. Whereas, Textron’s capital expenditure has remained fairly level at $300 million in the past few 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 has been sustaining earnings during the crisis, the slowdown in Aviation business remains a near-term concern.
  • Textron furloughed employees at its Wichita factory and sold its non-U.S. simulation business to CAE due to the slowdown. Whereas, Axon’s employee base increased by 33% (permanent and temporary) in 2020.

3. Risk

Per Q4 2020 filings, Textron reported $3 billion of long-term debt while Axon was free of long-term debt and finance lease obligations. Given Axon’s strong top-line growth and a debt-free balance sheet, the company has a lower credit risk than Textron.

  • Higher financial leverage coupled with continued revenue growth is responsible for generating surplus equity returns. However, Textron’s revenues have remained relatively flat in the past few years with interest expenses weighing on equity returns.
  • Axon’s multiple patents in areas of CED (conducted energy devices), software technology, and safety devices coupled with strong market presence provides the company an edge over the competitors. Thus, technological disruption or cheaper alternatives pose a major threat to long-term growth.
  • Axon has $1.5 billion of order backlog, representing nearly two years of revenues. Thus, we believe that the company faces low near-term risk from competitive products.
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