Here’s A Better Pick Over Textron Stock In The Aerospace & Defense Industry

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We think that Lockheed Martin stock (NYSE: LMT) is currently a better pick than Textron stock (NYSE: TXT) despite being the more expensive of the two, trading at 1.8x trailing revenues compared to 1.1x for Textron. Even if we look at the P/EBIT ratio, LMT stock appears more expensive, with a 17x P/EBIT ratio compared to 5x for TXT stock. The gap in the valuation of these two companies can be attributed to Lockheed Martin’s superior revenue growth and better profitability over the recent years, as discussed below.

Looking at stock returns, LMT has significantly outperformed TXT and the broader indices. LMT is up 22% YTD, TXT is down 12%, and the S&P500 index is down 10%. While both companies will likely see continued top-line expansion, Lockheed Martin is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe LMT 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. Lockheed MartinWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Lockheed Martin’s Revenue Growth Has Been Better Over The Recent Years

  • Both Textron and Lockheed Martin have seen a decline in revenue over the last twelve months. While Textron sales were down <1%, Lockheed Martin’s sales declined 4% over this period.
  • However, looking at a longer time frame, Lockheed Martin has outperformed, with its sales seeing an average growth rate of 7.7%% to $67 billion in 2021, compared to $53.8 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 many countries restricted air travel to contain the Covid-19 spread. Textron recently acquired Pipistrel, an electric aircraft company, which is now a part of Textron’s eAviation segment.
  • For Lockheed Martin, the strong revenue growth over the recent past has been led by higher production volume for its Sikorsky helicopter programs, AC-3, Long Range Anti-Ship Missile (LRASM), and the Joint Air-to-Surface Standoff Missile (JASSM) program, among others.
  • Furthermore, the ongoing Ukraine-Russia conflict has increased focus on the defense sector stocks. New business awards will likely drive the company’s performance in the near term, with possible increased defense spending, especially by NATO members.
  • Our Textron Revenue and Lockheed Martin Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Lockheed Martin’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 6.2% for Lockheed Martin, compared to a 4.9% 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. Lockheed Martin Has Been More Profitable

  • Textron’s current operating margin of 20% is better than 10% for Lockheed Martin.
  • However, that is not the case in historical years. Lockheed Martin’s operating margins have remained over 14%. between 2017 and 2020, before falling to 10% now, while that of Textron has been at 12% or lower over the same period, before rising to 20% currently.
  • Lockheed Martin’s free cash flow margin of 13.9% is marginally better than 13.5% for Textron.
  • Our Textron Operating Income and Lockheed Martin Operating Income dashboards have more details.
  • Textron has a total debt of $3.7 billion, compared to $11.6 billion for Lockheed Martin.
  • Textron’s 14.2% cash as a percentage of assets is better than 3.4% for the latter.

3. The Net of It All

  • We see that Lockheed Martin has demonstrated better revenue growth and has been more profitable over the recent years,  primarily explaining the difference in the valuation of these two companies. On the other hand, Textron has a better cash cushion, and it is trading at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Lockheed Martin is currently the better choice of the two, despite its higher valuation.
  • The table below summarizes our revenue and return expectations for Textron and Lockheed Martin over the next three years and points to an expected return of 15% for Lockheed Martin over this period vs. a -3% expected return for Textron, implying that investors are better off buying LMT over TXT, based on Trefis Machine Learning analysis – Textron vs. Lockheed Martin – which also provides more details on how we arrive at these numbers.

While LMT stock may outperform TXT, it is helpful to see how Textron’s Peers and Lockheed Martin’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 Marine Products vs. Amerco.

With inflation rising and the Fed raising interest rates, Textron has fallen 12% 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.

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 Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
TXT Return 4% -12% 40%
LMT Return 5% 22% 74%
S&P 500 Return 4% -10% 91%
Trefis Multi-Strategy Portfolio 8% -7% 267%

[1] Month-to-date and year-to-date as of 8/15/2022
[2] Cumulative total returns since the end of 2016

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