This Aerospace Company Appears To Be A Better Pick Over Textron Stock

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We believe that  Howmet Aerospace stock (NYSE: HWM), an aerospace company that manufactures components for jet engines, is currently a better pick than Textron stock (NYSE: TXT) despite being the more expensive of the two, trading at 2.0x trailing revenues compared to 1.0x for Textron. Looking at stock returns, Howmet Aerospace has outperformed Textron and the broader indices. While HWM is down 3% YTD, TXT is down 24%, aligning with the 24% fall in the S&P500 index. While both companies will likely see continued top-line expansion, Howmet Aerospace is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe HWM 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. Howmet AerospaceWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Howmet Aerospace’s Recent Revenue Growth Is Better

  • Howmet Aerospace’s revenue growth of 10.7% for the last twelve months is much better than a decline of under 1% for Textron.
  • However, looking at a longer time frame, Textron has fared better, with its sales declining at an average annual rate of 3.6% to $12.4 billion in 2021, compared to $14.0 billion in 2018, while Howmet Aerospace saw its revenue decline at an average rate of 9.0% to $5.0 billion in 2021, compared to $6.8 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.
  • Howmet Aerospace was formerly known as Arconic. In April 2020, Arconic completed separating its businesses into two independent, publicly-traded companies – Howmet Aerospace and Arconic Corporation. Following the separation, Arconic Corporation held the global rolled products, aluminum extrusions, and building and construction systems businesses, while Howmet Aerospace held the engine products, fastening systems, engineered structures, and forged wheels.
  • The revenue decline for Howmet Aerospace over the recent years can be attributed to lower sales volumes in the commercial aerospace market amid the impact of Covid-19. Furthermore, Boeing 737 MAX and Boeing 787 production declines also weighed on the company’s revenue growth.
  • Our Textron Revenue and Howmet Aerospace Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Howmet Aerospace’s revenue is expected to grow faster than Textron’s over the next three years, primarily due to a recovery in the commercial aerospace market and an expected rise in production for Boeing. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 4.9% for Textron, compared to a 14.1% CAGR for Howmet Aerospace, 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. Textron Is More Profitable

  • Textron’s current operating margin of 20.2% is slightly better than 17.6% for Howmet Aerospace.
  • This compares with 9.4% and 12.5% figures seen in 2019, before the pandemic, respectively.
  • Textron’s free cash flow margin of 13.5% is slightly better than 11.0% for Howmet Aerospace.
  • Our Textron Operating Income and Howmet Aerospace Operating Income dashboards have more details.
  • Looking at financial risk, Textron fares better. It has a total debt of $3.6 billion and a market capitalization of $12.5 billion, compared to a $4.3 billion total debt and $12.9 billion market capitalization for Howmet Aerospace. Textron’s 14.2% cash as a percentage of assets is also better than 5.3% for Howmet Aerospace.

3. The Net of It All

  • We see that Textron is more profitable, offers lower financial risk, and is trading at a comparatively lower valuation. On the other hand, Howmet Aerospace has seen better revenue growth in the recent past, and this trend is expected to continue going forward.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Howmet Aerospace is currently the better choice of the two, despite its higher valuation.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 32% for Howmet  Aerospace over this period vs. a -1% expected return for Textron, implying that investors are better off buying HWM over TXT, based on Trefis Machine Learning analysis – Textron vs. Howmet Aerospace – which also provides more details on how we arrive at these numbers.

While HWM stock may outperform TXT, 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 at how counter-intuitive the stock valuation is for Textron vs. Whirlpool.

With higher inflation and the Fed raising interest rates, among other factors, Textron has fallen 24% this year. Can it drop more? See how low Textron stock can 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 Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
TXT Return -5% -24% 22%
HWM Return -13% -3% 72%
S&P 500 Return -8% -24% 63%
Trefis Multi-Strategy Portfolio -12% -26% 195%

[1] Month-to-date and year-to-date as of 9/30/2022
[2] Cumulative total returns since the end of 2016

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