Should You Pick Textron Over Lockheed Martin Stock?

We believe that Textron stock (NYSE:TXT) is currently a better pick than its industry peer – Lockheed Martin stock (NYSE: LMT), given its better valuation and robust prospects. LMT stock trades at a higher multiple of 18x forward expected earnings, versus 14x for TXT, and we think this gap in valuation will narrow in favor of Textron. There is more to the comparison, and in the sections below, we discuss why we think TXT will outperform LMT in the next three years. In this analysis, we compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. TXT Stock Has Fared Better In The Last Three Years

LMT stock has shown gains of 30% from levels of $355 in early January 2021 to around $460 now, vs. an increase of about 70% for Textron from levels of $50 to around $85 over the same period. This compares with about 50% gains for the S&P 500 over this roughly three-year period. However, the increase in these stocks has been far from consistent. Returns for LMT stock were 0% in 2021, 37% in 2022, and -7% in 2023, while that for TXT stock were 60%, -8%, and 14%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that LMT underperformed the S&P in 2021 and 2023 and TXT underperformed the S&P in 2023.

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 LMT and TXT 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 expect both stocks to trend higher, Textron will likely fare better than Lockheed Martin.

2. Textron Has Seen Better Revenue Growth

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, Lockheed Martin has seen its sales rise at an average annual rate of just 1.1% from $65.4 billion to $67.6 billion over the same 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.

Lockheed Martin’s revenue growth over the recent years has been led by higher production volume for its Sikorsky helicopter programs, AC-3, Long Range Anti-Ship Missile (LRASM), and the Joint Air-to-Surface Standoff Missile (JASSM) program, among others. The company is seeing a higher volume of production contracts for F-35 and the national security space program driving its sales growth, a trend expected to continue in the near term. With ongoing geopolitical tensions in Russia-Ukraine and Israel-Hamas, the defense spending for some countries will remain elevated, boding well for Lockheed Martin.

Looking forward, we expect Textron to see its sales rise around 16% from $13.7 billion in 2023 to $15.8 billion in 2026. In comparison, we expect Lockheed Martin’s sales to rise around 9% from $67.6 billion to $73.8 billion over this period.

3. Lockheed Martin Is More Profitable And It Has A Better Financial Position

Lockheed Martin’s EBIT margin of 12.7% in 2023 has seen a slight decline from 14.3% in 2020, while Textron’s EBIT margin expanded from 3.8% to 8.5% over this period. Textron’s margin expansion can be attributed to a better price realization.

Looking at financial risk, both companies are comparable. Lockheed Martin’s 18% debt as a percentage of equity is slightly lower than 21% for Textron. However, the latter’s 9% cash as a percentage of assets is higher than 5% for Lockheed Martin, implying that Lockheed Martin has a better debt position and Textron has more cash cushion.

4. The Net of It All

We see that Textron has demonstrated better revenue growth and has more cash cushion. On the other hand, Lockheed Martin is more profitable and has a better debt position. Now, looking at prospects, we believe TXT is the better choice of the two. We estimate Textron’s Valuation to be $100 per share, reflecting an upside of over 15% from its current levels of around $86. Our valuation is based on a 16x P/E multiple and expected adjusted earnings of $6.27 per share in 2024. The 16x figure aligns with the stock’s average P/E ratio over the last four years.

In comparison, we estimate Lockheed Martin’s valuation to be $500 per share, reflecting an upside of under 10% from its current levels of $460. Our forecast for LMT is based on a 19x expected earnings of $26.20 in 2024. The 19x figure is higher than the stock average P/E ratio of 17x over the last four years. We think that a slight rise in valuation multiple for Lockheed Martin seems justified in the current environment of geopolitical tensions, bolstering the overall defense spending for some countries.

Despite assigning a higher valuation multiple to LMT, compared to its historical average, the upside potential for TXT remains higher. We think investors will likely be better off picking TXT over LMT for robust gains in the next three years.

While TXT may outperform LMT in the next three years, it is helpful to see how Lockheed Martin’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/9/2024
[2] Cumulative total returns since the end of 2016

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