After A 17% Fall In 2023 Will RTX Outperform Textron Stock?

TXT: Textron logo

Given its better prospects, we believe RTX Corp stock (NYSE: RTX) is a better pick than its sector peer, Textron stock (NYSE: TXT). RTX trades at a higher valuation multiple of 1.8x revenues vs. 1.1x for Textron, primarily due to its superior revenue growth. There is more to the comparison, and in the sections below, we discuss why we believe RTX will offer better returns than Textron in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of Textron vs. RTX CorpWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

TXT stock has seen solid gains of 60% from $50 in early January 2021 to around $80 now, while RTX stock has shown gains of 20% from $70 to about $85 over the same period. This compares with an increase of about 25% for the S&P 500 over this roughly 3-year period.

However, the increase in TXT and RTX has been far from consistent. Returns for TXT were 60% in 2021, -8% in 2022, and 14% in 2023. Similarly, returns for RTX were 23% in 2021, 19% in 2022, and -17% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TXT underperformed the S&P in 2023 and RTX underperformed the S&P in 2021 and 2023.

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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including BA, UNP, and CAT, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TXT and RTX face a similar situation as they did in 2023 and underperform the S&P over the next 12 months – or will they see a strong jump? We believe RTX will fare better between the two.

1. RTX’s Revenue Growth Is Better

  • RTX’s revenue growth has been better, with a 14.2% average annual growth rate in the last three years, compared to 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. Although Textron saw higher military volume in Q3’23, lower commercial volume offset it.
  • RTX Corp’s commercial airplane business was hit during the pandemic, weighing on its commercial OEM and aftermarket sales. This trend has now reversed, with both Pratt & Whitney and Collins Aerospace Systems segments driving the company’s sales growth in the recent past.
  • However, RTX stock was under pressure in 2023 due to its recall of over 1,000 Pratt & Whitney engines and associated costs.
  • If we look at the revenues for the last twelve months, Textron fares better, with sales growth of 6.9% vs. 1.6% for RTX.
  • Our Textron Revenue Comparison and RTX Corp Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, we expect revenue for RTX and Textron to grow at a low single-digit average rate in the near term.

2. Textron Is More Profitable 

  • Textron’s operating margin rose slightly from 6.9% in 2019 to 7.9% in 2022, while RTX’s operating margin fell from 12.7% to 10.9% over this period.
  • Looking at the last twelve-month period, Textron’s operating margin of around 8.3% fares marginally better than 7.3% for RTX.
  • Our Textron Operating Income Comparison and RTX Corp Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Textron fares better. While Textron’s 21% debt as a percentage of equity is lower than 29% for RTX, the latter’s 3% cash as a percentage of assets is lower than 10% for TXT. This means that Textron has a better debt position and more cash cushion.

3. The Net of It All

  • We see that RTX has seen better revenue growth, but Textron is more profitable and has a better financial position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe RTX is the better choice of the two.
  • Even if we look at valuation multiples, RTX fares better. Textron is trading at 1.1x trailing revenues, vs. the last five-year average of 1.0x. In contrast, RTX is trading at 1.8x revenues, compared to its last five-year average of 2.4x.
  • Our Textron (TXT) Valuation Ratios Comparison and RTX Corp (RTX) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for Textron and RTX over the next three years and points to an expected return of -8% for TXT over this period vs. an 18% expected return for RTX, based on Trefis Machine Learning analysis – Textron vs. RTX Corp – which also provides more details on how we arrive at these numbers.

While RTX 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.

 Returns Jan 2024
MTD [1]
YTD [1]
Total [2]
 TXT Return -2% -2% 62%
 RTX Return 2% 2% 42%
 S&P 500 Return -2% -2% 109%
 Trefis Reinforced Value Portfolio -4% -4% 582%

[1] Month-to-date and year-to-date as of 1/5/2024
[2] Cumulative total returns since the end of 2016

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