Rising Defense Spending And Business Aviation Will Secure Long-Term Opportunities

Key Takeaways

• Rising global defense spending and stable demand for business jets are boosting revenue visibility, earnings, and margin expansion across Textron's aviation and defense segments.
  
• Strategic advances in sustainable and autonomous aviation position Textron to benefit from industry shifts, diversify revenues, and drive multi-year growth.
  
• Limited innovation in sustainable aviation, reliance on defense contracts, and slow adaptation to industry disruption threaten Textron’s market share, revenue stability, and future profit margins.

Catalysts

Operates in the aircraft, defense, industrial, and finance businesses worldwide.

• Textron’s Bell segment is benefiting from rising global defense spending, evidenced by expanding military helicopter production—especially the multi-year ramp-up of the FLRAA program and sustained demand for legacy platforms—which is expected to boost backlog, provide strong revenue visibility, and drive earnings growth over the coming years.
  
• Demand for business jets remains robust, underpinned by expanding global economies and a shift in corporate travel norms, as reflected in stable backlog, healthy book-to-bill ratios, and increasing aftermarket revenue; these trends should support top-line growth and margin expansion as manufacturing efficiencies recover post-disruption.
  
• Textron is advancing in the development and commercialization of sustainable aviation and unmanned aerial solutions, as demonstrated by the certification milestone for the Beechcraft Denali turboprop engine and flight testing of hybrid-electric VTOL aircraft, which positions the company to capitalize on emerging new markets and diversify future revenues.
  
• Operational momentum is accelerating as productivity and supply chain disruptions in aviation manufacturing normalize, enabling higher production rates and structurally improved margins in the second half of the year, which should support both higher net earnings and free cash flow.
  
• Technology investment in electric/hybrid and autonomous systems, including unmanned platforms across air, land, and sea, positions Textron to capture incremental aftermarket and new-build opportunities driven by long-term industry shifts toward defense modernization and sustainable aviation, providing a runway for multi-year revenue and profit growth.

Textron Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Textron compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Textron's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.0% today to 7.1% in 3 years time.
• The bullish analysts expect earnings to reach $1.2 billion (and earnings per share of $7.52) by about July 2028, up from $831.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, down from 18.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 35.1x.
• Analysts expect the number of shares outstanding to decline by 3.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

Textron Future Earnings Per Share Growth

Risks

• Persistent underinvestment and limited competitiveness in electric and hybrid propulsion suggests Textron risks falling behind emerging next-generation players, which could impede long-term revenue growth and pressure future market share and earnings.
  
• Heavy dependence on U.S. government and defense contracts, exemplified by major programs like FLRAA and military sustainment, leaves Textron vulnerable to budget cuts or procurement reprioritization, potentially driving volatility in annual revenues and reducing top-line stability.
  
• Loss of the Shadow program and exposure to potential cancellations or declines in other defense-related platforms underscores the risk of lumpy and unpredictable defense backlog, which could negatively impact future revenue visibility and profit margins.
  
• Despite small advances in sustainable and electric aviation, Textron's current eAviation segment continues to operate at a loss, and its core aviation business remains concentrated in traditional, emission-intensive aircraft, raising the risk of regulatory headwinds and declining demand that could compress net margins and constrain future earnings.
  
• Slow response to industry disruption, such as new entrants in the eVTOL, AI, automation, and unmanned systems spaces, increases the threat of lost contracts and margin compression as Textron’s traditional manufacturing advantage erodes and competition intensifies, especially amid global decarbonization efforts.

Valuation

• The assumed bullish price target for Textron is $103.43, which represents two standard deviations above the consensus price target of $87.93. This valuation is based on what can be assumed as the expectations of Textron's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $107.0, and the most bearish reporting a price target of just $73.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $17.0 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of $86.04, the bullish analyst price target of $103.43 is 16.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.