Should You Pick GD Stock Over Textron?

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We believe that General Dynamics stock (NYSE: GD) is a better pick than its industry peer, Textron stock (NYSE: TXT), given its better prospects. Although GD stock trades at a higher valuation of 1.4x trailing revenues than 1.0x for TXT, this valuation gap makes sense given the former’s superior revenue growth and profitability.

Looking at stock returns, both have underperformed vis-à-vis broader markets amid rising concerns over supply-chain issues and slowing economic growth. While TXT is down 11% this year, GD is down 16%, and the S&P500 index is up 11%. There is more to the comparison, and in the sections below, we discuss why we believe GD stock will offer higher 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

  • For both companies, revenue growth has been tepid over recent years. Still, General Dynamics’ 0.1% average annual growth rate in the last three years fared slightly better than -1.4% for Textron.
  • 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. Weak 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, a trend expected to continue in the near term.
  • Even if we look at the last twelve-month period revenues, General Dynamics fares marginally better with sales growth of 3.7% vs. 3.1% for Textron.
  • Our Textron Revenue Comparison and General Dynamics Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, General Dynamics’ sales are expected to grow faster than Textron’s in 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 3.7% for Textron, compared to a 6.6% CAGR for General Dynamics, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and those 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 predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed 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. General Dynamics Is More Profitable 

  • Textron’s operating margin rose slightly from 6.9% in 2019 to 7.9% in 2022, while that of General Dynamics’ saw a marginal decline from 10.4% to 9.8% over this period.
  • Looking at the last twelve-month period, General Dynamics’ operating margin of 9.7% fares better than 7.8% for Textron.
  • Our Textron Operating Income Comparison and General Dynamics Operating Income Comparison dashboards have more details.
  • Textron’s free cash flow margin of 10.9% is a tad higher than 10.2% for General Dynamics.
  • Looking at financial risk, both are comparable. While Textron’s 30% debt as a percentage of equity is higher than 18% for General Dynamics, the latter’s 4% cash as a percentage of assets is lower than 10% for TXT. This means that General Dynamics has a better debt position, but Textron has more cash cushion.

3. The Net of It All

  • We see that General Dynamics has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Textron is trading at a comparatively lower valuation multiple and has more cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe General Dynamics is the better choice of the two.
  • Even if we compare the current valuation multiples to the historical averages, General Dynamics fares slightly better, with its stock currently trading at 1.4x trailing revenues, aligning with its last five-year average. In contrast, Textron’s stock trades at 1.0x trailing revenues vs. the last five-year average of 0.9x.
  • Our Textron (TXT) Valuation Ratios Comparison and General Dynamics (GD) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for Textron and General Dynamics over the next three years and points to an expected return of 0% for TXT over this period vs. a 15% expected return for GD, 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 11% 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? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
TXT Return 2% -11% 30%
GD Return 2% -16% 21%
S&P 500 Return 2% 11% 91%
Trefis Multi-Strategy Portfolio 3% 13% 255%

[1] Month-to-date and year-to-date as of 6/6/2023
[2] Cumulative total returns since the end of 2016

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