TXT - Textron: Likely A Stock To Hold For A Decade

Summary

• Bell, a subsidiary of Textron, won the V280 helicopter contract estimated to be worth $70 to $80 billion. Bell expects lower profits this year.
• The aviation business sales were $300 hundred million lower than guidance because of supply chain and labor issues. The aviation backlog increased by $3.5 billion.
• Earnings per share were up 21% in 2022 compared to the projected growth of 12% in 2023. Textron is a strong buy.

Investment Thesis:

Textron ( TXT ) has long-term solid growth from the V280 and electric-powered aircraft that will generate significant profits over the next decade.

Textron Segments

Textron generated $12.9 billion in revenue in 2022. Of this, only $3.5 billion were in industrial products, largely golf carts and automotive sales. The remaining 77% of revenues comes from aircraft. The following chart has the revenue and margins for 2022 and projections for 2023.

Textron Segments

The two segments that will grow in 2023 are aviation and industria l. In both cases, most of the profit growth comes from larger margins. eAviation was formed in 2022 with the purchase of a Slovenian aircraft company. The company is losing more money because it combined R&D work on electric aircraft. The two areas of most significant long-term growth will be Bell and eAviation. Textron continues introducing new models and spends 4% on research and development.

Textron Aviation

Textron Aviation produces general aviation aircraft ranging from jets, and multi-engine turboprops to single-engine piston aircraft. These are sold under the Beechcraft and Cessna brands. These businesses were hurt very badly by the recession of 2008. Sales have come back sharply in the last few years. Aviation’s backlog grew 55% in 2022 to end the year at $6.4 billion. Part of the reason for this growth and backlog is the difficulty of producing the aircraft. Aviation had reduced staff sharply in the recession and had difficulty recruiting staff to build the planes. In addition, the supply chain was also damaged during the recession and pandemic, so it has difficulty assembling the aircraft and problems moving components around on the production line. Financials show negative performance because of manufacturing issues. It is gaining ground on the problems, but it remains an issue, and if they become more efficient in assembling, the sales of aviation will go up.

Bell

In December, Bell won the contract for the Future Long Range Assault Aircraft (FLRAA) with their V280 design. They beat out a design from Lockheed Martin’s Sikorsky division ( LMT ) in and Boeing ( BA ). The contract is on hold pending a protest by these competitors. It is very doubtful that the contract would be affected. This plane will replace the long-serving Sikorsky Blackhawk. Sikorsky laid off 800 people two week, reflecting the loss of this contract. The protest will be decided at the end of the first week in April. After the protest, Textron will resume work on its $1.3 billion 19-month contract . Design and Manufacturing Phase is $232 million, which is vital but low-margin work.

The Army expects full-rate production to begin in Fiscal 2030. As the work progresses, the revenue and margins can be expected to increase. Margins further increase with design upgrades during production. The volume depends upon the interest in the plane by the Marines, Navy, and Air Force. Foreign sales and civilian versions are also possible. The V280 is faster and has a longer range than the competing design. Both competitors were faster with longer range than helicopters like the Blackhawk, but they are considerably more expensive. So, the question is whether the Army will retain the older versions in their fleet limiting V280 sales. The V280 volume will be substantial in the thirties and forties, but the volume is uncertain.

Bells sales of civil helicopters increased in the last quarter. Bell is also working on the Future Armed Reconnaissance Aircraft (FARA) in competition with Sikorsky. This program is about two years behind the V280.

Textron Systems

Textron Systems principal product is the ship-to-shore air-cushioned assault vehicle. The division lost considerable volume with the withdrawal from Afghanistan. It has found other contracts so that the revenue is roughly flat at about $ 1.25 Billion.

Industrial

The industrial segment produces golf carts, other recreational vehicles, and automotive products. The business has achieved margins one percentage point above their previous level.

eAviation

Management believed that it could be very effective with electric- powered vehicles because they design and manufacture aircraft of that weight class. All they needed was more expertise in the electrical side of the equation. Textron purchased Pipistrel in 2022 to get that electrical expertise. Design activities that were previously done by corporate were combined with the acquisition to develop a line of electrically powered aircraft. The eAviation profit is down because cost were transferred for corporate staff to eAviation. They believe that this will produce a very competitive product line over the next few years.

Risks and Opportunities

The possibility of recession is a significant risk to the aviation business. The large order backlog mitigates this risk because the company can work down its backlog and continue producing at the regular rate.

The Army V280 contract is stable because of the Ukrainian war and problems with China, are making their new design much more valuable.

Valuation

Textron projects 2023 earnings per share at about $4.40 to $4.60. The high end of this EPS would come from higher Textron aviation production, which has a large order backlog. Textron's stock current trades at a P/E ratio of 15x which does not adequately account for potential upside, in my opinion. Over the last 5 years, the stock has risen by 22%..

The Bell V 280 will generate higher margins in 2024 when the next contract comes up. This program will increase margins well into the 2030s. eAviation should start to generate positive results in the late 20s so long-term earnings will be high.

In fiscal 2030 it is reasonable to assume that the Army helicopter and the electric propulsion will generate additional revenue of $4 million. With a margin of about 10% that would increase earnings by $400 million. Textron buys back about 6% of its stock annually, meaning that by 2030 only 65% of the shares will remain. Thus in fiscal Bell and eAviation could earn $3.00 per share. With its high Research and Development spending Textron Aviation and other operations should continue to grow at 20%. Textron is unusually attractive.

Conclusions

Textron is a high-growth stock with relatively low risk. It is a strong buy.

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