Is Textron Stock A Buy?

Is Textron Stock A Buy? Pent-up demand for jets, two very big multibillion-dollar Army awards in the pipeline, and above expectations fourth-quarter results, are some of the reasons that could get investors excited about owning TXT stock again.

Textron [NYSE: TXT] is an American multi-industry conglomerate with operations in aircraft, defense, industrial products and finance. Textron designs and manufactures civilian and military helicopters, turboprop aircraft, power tools, golf cars, and a variety of defense products.

The company primarily has five operating segments:

• Textron Aviation,
• Bell,
• Textron Systems,
• Industrial; and
• Finance

The Textron Aviation segment deals in general aviation. It manufactures, sells and services Beechcraft and Cessna aircrafts whereas the Bell segment supplies military helicopters to the United States Government and military customers across the globe.

Textron Systems is a supplier for the defense, aerospace and general aviation markets.

The Industrial segment designs and manufactures a range of automotive, general aviation and defense products. The Finance segment consists of Textron Financial Corporation (TFC) and its subsidiaries.

The Providence, Rhode Island-based company is recognized for its powerful brands such as Arctic Cat, Bell Textron, Beechcraft, Hawker, and Cessna, to name a few. It was founded by Royal Little in 1923 as the Special Yarns Company, and was renamed Textron in 1944.

Textron Revenue Fell But The Future Is Bright

Textron stock, of late, has been an underachiever of sorts, down 22% over the past three years.

The company, which makes an extensive variety of products, ranging from airplanes to power tools, has been battling a range of issues in various segments that have proven to be an impediment to its earnings and wilted investors’ enthusiasm about the stock.

Textron has been working hard to set its house in order, and the same is reflected in its fourth-quarter earnings, which topped expectations on both, revenue and earnings front. 

Revenue and earnings were lower in comparison to last year, but the conglomerate was pretty upbeat about its forward guidance.

For the fourth quarter 2020, the company’s revenue was $3.7 billion, down $368 million from last year. Adjusted net income was $1.06 per share compared to $1.11 in last year’s fourth quarter. The consensus estimate was EPS of $0.91 on revenues of $3.50 billion.

For the full year, Textron’s revenues were $11.7 billion, down from $13.6 billion a year ago. Adjusted net income was $2.07 per share compared to $3.74 last year. The company ended the year with approximately $2.3 billion of cash on the balance sheet.

And segment-wise revenues at Textron Aviation of $1.6 billion were down $169 million, or 10%, primarily on lower jet deliveries and lower aftermarket volume. The company delivered 61 jets, down from 71 last year.

Moving to Bell, revenues were $871 million, down from $961 million last year, primarily on lower military revenues and commercial volume.

At Textron Systems, revenues were $357 million, down from $399 million a year ago, primarily due to lower volume at TRU Simulation and training.

Industrial revenues were $866 million, a decrease of $61 million from last year, primarily due to reduced demand in the ground support equipment business within Specialized Vehicles.

Finance segment revenues were $13 million and profit was $2 million.

Textron Forward Guidance Is Full Of Optimism

The company overcame temporary manufacturing shutdowns and disruptions in its end markets to deliver above expectations fourth-quarter results, and management hopes it will carry the momentum forward to deliver stellar results in 2021.

The company’s guidance was filled with optimism as it projected revenues of about $12.5 billion for 2021.

At Aviation, the company hopes to derive growth from increased aircraft deliveries on both, jets and turboprops, including the entry into service of its new Cessna SkyCourier and higher aftermarket revenues driven by increased fleet utilization.

At Systems, the conglomerate expects higher revenues and margin expansion, primarily driven by growth in ATAC and Marine and Land Systems.

In the Bell segment, Textron expects slightly lower revenues of about $3.1 billion, reflecting decreased military revenues from a lower H-1 production and aftermarket volume and lower commercial deliveries.

At Industrial, it expects revenue growth and margin improvement at Kautex as auto demand continues to recover from pre-COVID levels. The company is projecting adjusted EPS in the range of $2.70 to $2.90 per share, and R&D expenditure of about $600 million, up from $545 million in 2020.

Big Contracts Could Bolster Textron Top Line

Textron derives a considerable amount of revenue from its airplane business, and post pandemic rebound in airline traffic should help bolster its revenue. 

More importantly, with life returning to some level of normalcy, Textron expects its Cessna business jet unit to grow sales by 20% in 2021, with a refreshed product lineup.  With aging fleets, there’s a pent-up demand for jets, which is likely to benefit Cessna. More importantly, Textron’s military operation has significant potential to bolster the struggling company’s fortune in the near future.

Also, Textron’s Bell unit is a prime contender for two very big multibillion-dollar Army helicopter contracts, and bagging even one would go a long way in lifting its sagging fortunes, and cementing its position as a defense contractor of repute.

Bell’s V-280 Valor is one of two contestants (and tipped as the favorite to win) in the Army’s Future Long Range Assault Aircraft competition, and it is also one of five competitors in a separate Future Attack Reconnaissance Aircraft competition.

The $40 billion contract (to replace the Blackhawk) could open the floodgates of heaven for the company and its investors. The outcome of the contract would be known somewhere in late 2021, and the deliveries will start in 2023.

Some may argue that it is a long time to wait, but with Bell and Cessna, there’s still reason for hope and optimism. Having waited for quite some time for a turnaround in fortune, there’s no harm in waiting some more, especially with few rays of light visible at the end of the tunnel.

Moreover, Textron has other irons in the fire as well. Textron is in reckoning for contracts to build the Army’s next squad weapon and drones, which is a sign of growth, and a surprisingly good one at that.

Textron Vs S&P 500: Significant Underperformance 

Textron shares have failed to live up to investors’ expectations over the past few years.  It has underperformed the S&P 500 by more than 50 percentage points, as the conglomerate found its different segments bogged down by myriad operational issues.

It is a multi-industry conglomerate, which has its hands in a lot of different businesses. Every quarter, the company was confronted by problems in different part of its expansive portfolio. It was like the management was dousing a fire at one place, only to be confounded by another fire that sprang up somewhere else.

At one time, it was experiencing trouble at its industrial businesses, with its snowmobile unit down in the dumps. And then the pandemic struck, sending its commercial aerospace sales into a tizzy. 

In spite of the aging business jet fleets and availability of vaccines, there’s still this fear of post-pandemic recession tampering with the demand and sales of new jets, which means Cessna could be headed for an extended slump.

Crashing oil prices could be another cause of concern for the company. Falling oil prices, which means cheaper jet fuel, may make jet operators less enthusiastic about replacing their old fuel-guzzling jets with newer, more fuel-efficient ones during a period of uncertainty. 

Additionally, energy prices also concern Bell’s commercial helicopter business, since offshore rigs require extensive helicopter services for their operation.

CEO Scott Donnelly stated the same, conceding “this is the great unknown,” and said that, while he believes the dynamics today are different than in 2008, only time will tell.

Textron’s earnings in recent years have been little to write home about, because of the company’s inability to get its different businesses firing at the same time. Management, nevertheless, is pretty optimistic about its future prospects, which should give investors a few more incentives to stick around with the company.

Is Textron Stock A Buy Vs Defense Contractors?

Since Textron is a multi-industry company, it competes with different organizations in the different segments that it operates.

In Bell commercial and military helicopters segment, its main competitors in the US and across the globe are Boeing, Airbus, Cicaré, Lockheed Martin and AgustaWestland, to name a few.

Keep in mind that the nature of the defense industry is such that two competing organizations may cooperate to build a product, while they remain competitors on other systems. For example, Bell Helicopter and Boeing together formed the Bell-Boeing Joint Project Office to build the V-22 Osprey (CV-22/MV-22, the only military tilt-rotor aircraft.

Textron Aviation (Cessna + Beechcraft) is one of the world’s biggest manufacturer of general aviation aircraft measured by units sold. The main competitors of Textron Aviation in both, domestic and international market, include, Bombardier, Gulfstream (General Dynamics), Embraer, Cirrus Aircraft and Dassault Aviation.

Aerospace giant Boeing [BA], with a market cap of nearly $120 billion, is primarily known for its commercial jets, but it is also a force to reckon with in the defense and space segment, which accounted for $6.8 billion in the fourth quarter.

In 2020, its defense segment generated $26.25 billion for the company. Boeing has legacy fleets of fighter aircraft like the F/A-18 and F-15, which have proved to be some of the most successful modern fighters. The P-8A Poseidon maritime surveillance aircraft for the U.S. Navy, one of Boeing’s most advanced, has seen international success with naval military forces across the globe. 

Boeing currently offers a highly lucrative bargain for investors who are looking for down-and-out stock of a top company. Boeing, not long ago, was in the dumps following multiple accidents with its new 737 MAX aircraft model, and to make matters worse, the pandemic brought air travel to a grinding halt.

BA share price plummeted more than 80% from its highs in early 2019 as the company suffered huge losses in 2020. The company though, of late, has been in a rebound mode with stock price having more than doubled from its lows.

The Federal Aviation Administration has given the green signal for the return of the troubled 737 MAX to service. Moreover, Covid-19 vaccines have begun rolling out, which augurs well for air travel.

Global aerospace and defense company General Dynamics [NYSE: GD] generated $38 billion in revenue in 2020, while its total fourth-quarter revenue was $10.5 billion. One of the top business aviation companies, GD had a rough 2020 primarily because of its Gulfstream aerospace business. 

With the pandemic bringing air travel to a standstill, demand for business jets suffered a tremendous decline, choking off revenue for a large business inside GD. 

With encouraging news on the vaccine front, things have been returning to normal for the company. Having said that, the company’s performance was downbeat even before the pandemic struck, dogged by a business jet down cycle that has proven tenacious.

Looking ahead, 2021 is expected to be a good year for the company, as it has bagged a $9.5 billion contract from the Navy to build the first Columbia-class sub submarine. Also, the nation’s business jet fleet is aging, which should prove a boost to its laggard Gulfstream business.

Is Textron Stock A Buy: The Bottom Line

Textron has its hands in many pies, with the conglomerate making a diverse range of products ranging from golf cars, helicopters to turboprop aircrafts.

Ironically, the company’s revenue diversity, of late, has been its Achilles heel, with its one or the other segment continuously facing trouble instituted by a host of factors.

However, heading into 2021, Textron is hopeful of benefitting from continued improvement in its end markets and ongoing investments in new products and programs.

The conglomerate should benefit from pent-up demand for jets, especially since a majority of corporate fleets are older than a decade, and ripe for renewal.

Additionally, there’s hope on the horizon in the form of Textron bagging that multi-billion Army helicopter contract.  With the gradual opening of the economy, flying hours are bound to gather pace, which will allow Textron’s aviation sales team to resume normal sales calls. 

Plus, it will also bolster its commercial parts sales, and maintenance, inspection, and repair services business. Moreover, since TXT is currently undervalued, it may be the right time to increase your holdings in this stock.

All in all, Textron has been a laggard, but a broader market sentiment, a positive forward guidance and the company’s efforts to add to its military business, makes it worth a look.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.