After over a 24% fall year-to-date, at the current levels, we believe Textron stock (NYSE: TXT) can see much higher prices. TXT stock fell from $76 in early January to $58 now. The YTD -24% return for TXT marks largely an in-line performance with -21% returns for the broader S&P500 index.
Looking at the longer term, TXT stock is up 10% from levels seen in late 2018. This marks an underperformance compared to some of its peers and the broader markets, with General Dynamics stock rising 40%, Northrop Grumman stock up 88%, and the S&P 500 index rising 52% over the same period.
This 10% rise for TXT stock over the last three years was driven by: 1. the company’s P/E ratio, which grew 11% to 17.6x trailing adjusted earnings currently, from 15.8x in 2018, partly offset by 2. a 1% decline in its adjusted earnings to $3.30 in 2021, compared to $3.34 in 2018. The earnings decline can be attributed to an 11% fall in the company’s revenues to $12.5 billion currently, compared to $14.0 billion in 2018.
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The revenue decline can primarily be attributed to the impact of the Covid-19 pandemic on the company’s businesses, especially aviation, and industrial. A decline in aircraft utilization impacted its aviation aftermarket business as well. Tepid travel demand and supply chain issues led to order cancellations in 2020. However, the resurgence of new infectious waves pushed the demand for private jets as most countries restricted air travel to contain the Covid-19 spread.
The aviation segment will likely drive the company’s revenue growth in the coming years. The demand for business jets is increasing, and there is a rise in people traveling post-pandemic. This will bode well for Textron’s aviation business. In fact, it reported a solid 20% y-o-y organic growth for the aviation segment in Q1 ’22. We expect this trend to continue going forward. While Textron’s adjusted net income margin of 6% in 2021 remains at the same level it was in 2018; it is expected to expand with the pricing actions.
While the company has strong prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. However, we estimate Textron’s valuation to be $85 per share, reflecting a significant 46% upside from its current market price of $58, implying that investors may be better off using the recent dip to enter TXT stock for gains in the long run. Our valuation is based on a forward P/E ratio of over 22x based on our earnings forecast of $3.75 on a per-share basis for full-year 2022. This compares with an average of 18x seen over the last three years. We have allocated a higher earnings multiple for Textron due to high expected future growth.
While TXT stock has more room for growth, it is helpful to see how Textron’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, 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 Honeywell vs. Amkor Technology.
With inflation rising and the Fed raising interest rates, Textron has fallen 24% this year. Can it drop more? See how low can Textron stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.