BA - Textron rated Peer Perform in new coverage by Wolfe Research

2023-04-06 12:13:51 ET

Textron ( NYSE: TXT ) on Thursday was rated Peer Perform in new coverage by analysts at Wolfe Research. They said the industrial conglomerate is fairly valued amid changes to several of its business segments and reduced demand for private planes as airline travel rebounds from the pandemic.

“Business jet utilization in the United States and Europe peaked in June 2022 and while it remains above pre-COVID levels, we've seen some of the pandemic froth come out of the market over the last 6-plus months,” Myles Walton, analyst at Wolfe Research, said in an April 6 report. The firm last year stopped publishing price targets on Peer Perform-rated stocks.

Wolfe estimated Textron’s ( TXT ) adjusted EPS will expand from $4.01 last year to $5.13 in 2023, $5.76 in 2024 and $6.27 in 2025.

Defense Contracts

Textron’s ( TXT ) defense business is in transition after the U.S. Army selected the company’s Bell Textron unit to make its next-generation combat helicopter to replace the UH-60 Black Hawk, according to Wolfe. The Future Long-Range Assault Aircraft (FLRAA), as the helicopter is known, may have a lifetime value of $70 billion to $80 billion dollars.

“With production of the V-22 Osprey winding down, which had been the cornerstone of Bell's military offering, FLRAA will help to fill the gap given the long runway of the program,” according to Wolfe. “FLRAA should ramp from about $350 million in sales in 2023 to $1.2 billion in 2026.”

The main rival to Textron’s ( TXT ) V-280 Valor tilt-rotor contract was the Defiant X proposed by Boeing ( BA ) and its partner Sikorsky, a unit of defense contractor Lockheed Martin ( LMT ). Lockheed in December protested the award and awaits a decision from the U.S. Government Accountability Office on whether the competition can be reopened.

Textron’s Breakup Value?

Textron ( TXT ) has the possibility to unlock value by spinning off industrial businesses such as Kautex, a maker of plastic products for the auto industry. A divestiture would mirror the broader trend of conglomerates breaking up into more focused companies as General Electric ( GE ) is doing, according to Wolfe.

“We do believe that it is the right time for Textron ( TXT ) to look at strategic alternatives for its industrial segment whether that be a spin, a sale or even multiple sales,” Wolfe said, while acknowledging Textron ( TXT ) doesn’t need to sell business units to raise cash.

Wolfe estimated an equity value of about $2.5 billion based on a price-to-earnings multiple of 16 times an EPS of $0.87 for Textron’s ( TXT ) industrials segment in 2024. The firm also estimated an enterprise value of $3.4 billion based on an enterprise value-to-EBITDA multiple of 12.5 times its estimate of $275 million in 2024 for gross proceeds of about $3 billion.

“With the era of industrial conglomerates now fully aged out, a balance sheet repaired and a questionable growth future at Kautex (50%-plus of [industrial] sales), the segment would seem ripe for divestiture at the right price,” Wolfe said.

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