With 15% Gains This Year Is Fox Corp A Better Pick Over Textron Stock?

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Trefis
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TXT
Textron

Given its better valuation and prospects, we believe Fox Corporation stock (NASDAQ: FOXA), a company formed as the portion of 21st Century Fox not acquired by Disney in 2019, is a better pick than Textron stock (NYSE: TXT). The decision to invest often comes down to finding the best stocks within the scope of certain characteristics that suit an investment style. In this case, although these companies are from different sectors, they share a similar revenue base of around $14 billion and a similar market capitalization of $16 billion. We see that Fox has seen better revenue growth and is more profitable. There is more to the comparison, and in the sections below, we discuss why we think Fox will outperform Textron in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. TXT Stock Has Outperformed FOXA In The Last Three Years

TXT stock has seen extremely strong gains of 70% from levels of $50 in early January 2021 to around $85 now, vs. FOXA stock which has witnessed gains of just 15% from $30 to $35 over this period. This compares with an increase of about 45% for the S&P 500 over this roughly three-year period. However, the increase in these stocks has been far from consistent. Returns for TXT stock were 60% in 2021, -8% in 2022, and 14% in 2023, while that for FOX were 27%, -18%, and -2%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that TXT and FOXA underperformed the S&P in 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 CAT and HON, 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 FOXA 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? While we think both stocks will trend higher, FOXA will likely outperform TXT.

2. Fox’s Revenue Growth Is Better

Textron has seen its revenue rise at an average annual rate of 5.5% from $11.7 billion in 2020 to $13.7 billion in 2023. On the other hand, Fox’s revenue grew at an average rate of 6.6% from $12.3 billion to $14.9 billion over this period.

Textron’s revenue growth has been driven by higher pricing for Aviation, Bell, and Industrial segments. The company delivered 168 Citation jets and 153 commercial turboprops in 2023, versus 132 Citation jets and 113 commercial turboprops in 2020. Increased jet deliveries aided commercial sales, a trend expected to continue. Textron has also benefited from higher military revenues from the Army Future Attack Reconnaissance Aircraft (FARA) program lately. Industrial revenue is trending higher amid increased Kautex sales and specialized vehicle sales. Looking forward, the company expects its 2024 revenues to be around $14.6 billion, up from $13.7 billion in 2023.

Fox’s revenue growth is being led by its advertising revenues for the Television segment. Fox reports its revenues in two segments – Cable Network Programming, and Television. While Cable Network Programming revenue grew 10% between 2020 and 2023, Television sales were up 31%, primarily driven by a 39% rise in advertising sales. Looking forward, Fox is expected to see a strong sales growth in the coming quarters, driven by continued improvement in advertising. It should benefit from the Presidential election cycle in the second half of this year, and the Super Bowl in 2025.

3. Fox Is More Profitable 

Textron’s operating margin expanded from 4.4% in 2020 to 7.7% in 2023, while Fox’s operating margin contracted from 20.3% to 18.5% over this period. Textron’s margin expansion can be attributed to a better price realization. Looking at the last twelve-month period, Fox’s operating margin of 17.5% fares much better than 7.8% for Textron.

Looking at financial risk, both companies are comparable. Textron’s 21% debt as a percentage of equity is much lower than 53% for Fox. However, its 9% cash as a percentage of assets is lower than 17% for Fox, implying that Textron has a better debt position, but Fox has more cash cushion.

4. The Net of It All

We see that Fox has seen better revenue growth, is more profitable, and has more cash cushion, while Textron has a better debt position. Now, looking at prospects, we believe FOX is the better choice of the two. We estimate Textron’s Valuation to be $100 per share, reflecting an upside of around 15% from its current levels of around $86. Textron stock trades at 1.2x trailing revenues, compared to 1.2x average over the last four years. In contrast, Fox stock trades at 1.1x revenues, compared to 1.3x average over the last four years.

Overall, we think FOXA is likely to offer better returns than TXT in the next three years. Not only does Fox have better revenue growth and profitability, its prospects look solid, amid strong advertising growth. With upcoming events such as the Presidential election, Fox can look forward to higher advertising growth.

While FOXA may outperform TXT in the next three years, 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.

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 TXT Return -1% 8% 78%
 FOXA Return 0% 16% -7%
 S&P 500 Return 4% 15% 144%
 Trefis Reinforced Value Portfolio 2% 6% 656%

[1] Returns as of 6/27/2024
[2] Cumulative total returns since the end of 2016

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