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

TXT: Textron logo

We believe that  General Dynamics stock (NYSE: GD), an aerospace & defense company, 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 1.2x for Textron. Looking at stock returns, General Dynamics, with a 20% rise this year, has outperformed Textron, down 9%, and the broader S&P500 index, down 16%. While both companies will likely see continued top-line expansion, General Dynamics is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe GD 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, in an interactive dashboard analysis of Textron vs. General DynamicsWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. General Dynamics’ Revenue Growth Is Better

  • General Dynamics’ revenue growth of 0.5% for the last twelve months is a tad better than a decline of 1.4% for Textron.
  • Even if we look at a longer time frame, General Dynamics has fared better, with its sales rising at an average annual rate of 2.2% to $38.5 billion in 2021, compared to $36.2 billion in 2018. In comparison, Textron’s sales have declined at an average annual rate of 3.6% to $12.4 billion in 2021, compared to $14.0 billion in 2018.
  • The revenue decline for Textron can primarily be attributed to the impact of the Covid-19 pandemic on the company’s businesses, especially aviation and industrial. A reduction in aircraft utilization impacted its aviation aftermarket business as well. Tepid travel demand and supply chain issues led to order cancellations in 2020.
  • While aviation demand has picked up over the last year or so, Textron’s Bell helicopter revenue has decreased due to lower military demand.
  • General Dynamics’ revenue growth has been led by ship construction and aircraft services. While the aircraft deliveries were lower in 2021, they are expected to trend higher over the coming quarters as the company increases its production.
  • Our Textron Revenue Comparison and General Dynamic Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, General Dynamic’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 8.4% for General Dynamics, compared to a 4.5% 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. Both Have Similar Profitability

  • Textron’s current operating margin of 10.1% aligns with 9.8% for General Dynamics.
  • This compares with 9.4% and 10.4% figures seen in 2019, before the pandemic, respectively.
  • Textron’s free cash flow margin of 11.0% is slightly lower than 14.4% for General Dynamics.
  • Our Textron Operating Income Comparison and General Dynamics Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Textron has a total debt of $3.8 billion and a market capitalization of $14.6 billion, compared to a $13.2 billion total debt and $68.9 billion market capitalization for General Dynamics, implying that the latter has a better debt position. However, Textron’s 11.8% cash as a percentage of assets is better than 4.9% for General Dynamics, giving it a better cash cushion.

3. The Net of It All

  • We see that General Dynamics stock has seen better revenue growth, has similar profitability as Textron, and has a better debt position. On the other hand, Textron has more cash cushion and is available 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 General Dynamics 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 14% for General Dynamics over this period vs. a -4% expected return for Textron, implying that investors are better off buying GD over TXT, based on Trefis Machine Learning analysis – Textron vs. General Dynamics – which also provides more details on how we arrive at these numbers.

While GD 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 9% 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 Dec 2022
MTD [1]
YTD [1]
Total [2]
TXT Return -2% -9% 44%
GD Return -1% 20% 45%
S&P 500 Return -2% -16% 79%
Trefis Multi-Strategy Portfolio -2% -19% 220%

[1] Month-to-date and year-to-date as of 12/6/2022
[2] Cumulative total returns since the end of 2016

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