Despite Rising Jet Deliveries There Is A Better Pick Over Textron Stock

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We think that Intuit stock (NASDAQ: INTU), a company that specializes in financial and tax preparation software, is currently a better pick than Textron stock (NYSE: TXT), best known for its helicopters and jets, despite it being the more expensive of the two, trading at 9.5x trailing revenues compared to 1.2x for Textron. Even if we were to look at the P/EBIT ratio, INTU stock appears to be more expensive, with a 42x P/EBIT ratio compared to 17x for TXT stock. The gap in the valuation of these two companies can be attributed to Intuit’s superior revenue growth and better profitability, as discussed below. We compare these two companies due to their similar revenue base.

Looking at stock returns, both TXT and INTU have seen a rise of 4% each over the last twelve months. This compares with -1% return in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Intuit is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that INTU stock will offer better returns than TXT stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Textron vs. IntuitWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Intuit’s Revenue Growth Has Been Stronger

  • Intuit’s revenue growth of 48% over the last twelve months is much better than a 6% rise for Textron.
  • Looking at a longer time frame, Intuit’s sales grew at an average growth rate of 17% to $9.6 billion in 2021, compared to $6.0 billion in 2018, while Textron saw its revenue decline at an average rate of 3.6% to $12.4 billion in 2021, compared to $14.0 billion in 2018.
  • Textron’s 2020 sales were adversely impacted by tepid travel demand and supply chain issues. However, the resurgence of new infectious waves in 2021 pushed the demand for private jets as most countries restricted air travel to contain the Covid-19 spread. The company recently reported its Q1 results, which were better than the street estimates, led by more robust business jet deliveries.
  • Just last month, Textron closed its acquisition of Pipistrel, an electric aircraft company, which is now a part of Textron’s eAviation.
  • For Intuit, the strong revenue growth over the recent past can be attributed to more people and small businesses opting to file tax returns on their own rather than visiting an accountant, especially since the beginning of the Covid-19 pandemic.
  • Furthermore, in Q2FY21, the company acquired Credit Karma (now a separate reportable segment), which garnered $862 million in revenue in the first six months of fiscal 2022. The segment offers personalized recommendations of credit card, home, auto, and personal loans, and insurance products, among others, to its customers. It generates revenue from cost-per-action transactions related to credit card issuances and private loan funding.
  • Our Textron Revenue and Intuit Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Intuit’s revenue is expected to grow faster than Textron’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 12.0% for Intuit, compared to a 4.7% CAGR for Textron, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Intuit Is More Profitable, And It Comes With Lower Risk

  • Intuit’s 2021 operating margin of 26% was better than 8% for Textron.
  • This compares with 27% and 8% figures seen in 2019, before the pandemic, respectively.
  • Intuit’s free cash flow margin of 28% is also better than 13% for Textron.
  • Our Textron Operating Income and Intuit Operating Income dashboards have more details.
  • Looking at financial risk, Intuit is better placed than Textron. Its 6% debt as a percentage of equity is lower than 25% for Textron, while its 25% cash as a percentage of assets is higher than 13% for Textron, implying that Intuit, with its better debt position and higher cash cushion, offers lower financial risk compared to Textron.

3. The Net of It All

  • We see that Intuit has demonstrated better revenue growth, is more profitable, has a better debt position, and has a higher cash cushion than Textron, primarily explaining the difference in valuation of these two companies. Going by historical data, Intuit is a clear pick among the two.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Intuit is currently the better choice of the two, despite its higher valuation.
  • The table below summarizes our revenue and return expectations for Textron and Intuit over the next three years and points to an expected return of 33% for Intuit over this period vs. a -6% expected return for Textron, implying that investors are better off buying INTU over TXT, based on Trefis Machine Learning analysis – Textron vs. Intuit – which also provides more details on how we arrive at these numbers.

While INTU stock may outperform TXT, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Textron vs. Tyson Foods.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns May 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
TXT Return 1% -10% 44%
INTU Return -2% -36% 258%
S&P 500 Return 0% -13% 85%
Trefis Multi-Strategy Portfolio 0% -17% 227%

[1] Month-to-date and year-to-date as of 5/6/2022
[2] Cumulative total returns since the end of 2016

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