What’s Next For Textron Stock After A 5% Fall In A Week?

Textron (NYSE: TXT) recently reported its Q2 results, with the top line aligning and the bottom-line exceeding our estimates. The company reported revenues of $3.5 billion and adjusted earnings of $1.54 per share, compared to our estimates of $3.5 billion and $1.48, respectively. The Textron Aviation and Bell segments continued to drive the sales growth for the company. In this note, we discuss Textron’s stock performance, key takeaways from its recent results, and valuation.

TXT stock has seen extremely strong gains of 80% from levels of $50 in early January 2021 to around $90 now, vs. an increase of about 45% for the S&P 500 over this period. However, the increase in TXT stock has been far from consistent. Returns for the stock were 60% in 2021, -8% in 2022, and 14% 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.

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 UNP, 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 face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, TXT stock looks like it has some room for growth. We estimate Textron’s Valuation to be $100 per share, reflecting an upside of over 10% from its current levels of around $90. Our forecast is based on 16x the company’s expected earnings of $6.27 per share in 2024. The 16x figure aligns with the stock’s average P/E ratio over the last three years.

Textron’s revenue of $3.5 billion in Q2, reflected a 3% y-o-y rise. The growth was led by the Bell segment, up 13%.  This can be attributed to higher military revenues, partly offset by fewer deliveries of commercial helicopters. The Aviation segment revenue rose 8% due to higher deliveries of commercial turboprops and better price realization. Textron Systems sales were up 5.6% driven by higher volume. Industrial sales were down 11% due to lower volume and mix. The company’s segment profit margin contracted by 42 bps y-o-y to 9.6% in Q2. Its bottom line stood at $1.54 on an adjusted basis in Q2, reflecting a 5.5% y-o-y growth.

Looking forward, the company kept its outlook unchanged and expects its earnings to be in the range of $6.20 and $6.40 in 2024. The company will likely continue to benefit from higher deliveries and contribution from the military programs. Overall, Textron posted in-line results. However, a contraction of margins was a slight let down. The stock has seen a fall of around 5% in the last five days, and we think this leaves some room for growth.

While TXT stock looks like it may see higher levels, 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.

[1] Returns as of 7/24/2024
[2] Cumulative total returns since the end of 2016

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