Aviation Innovation And eVTOL Advancements Propel Aerospace Growth Potential

Key Takeaways

• U.S. Army's FLRAA program and increased orders in Textron Aviation suggest substantial future revenue and margin growth.
  
• Advancements in eVTOL and unmanned systems present promising growth in emerging markets, potentially driving future earnings.
  
• Labor strikes and market softness threaten Textron's revenue, profit, and cash flow, raising concerns over earnings stability and stakeholder returns.

Catalysts

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

• The U.S. Army's approval of Milestone B for the FLRAA program and its transition to engineering and manufacturing development is a catalyst for significant revenue growth, evidenced by a $2.3 billion backlog increase at Bell. This is expected to positively impact future revenues and earnings.
  
• Increased order activity and the announcement of Gen 3 updates for Citation M2, CJ3, and CJ4 indicate strong demand and investment in Textron Aviation's product portfolio. This is likely to enhance future revenues and margins due to enhanced product offerings and pricing power.
  
• Despite the short-term impact of a labor strike, the resolution and a new 5-year contract provide stability and an opportunity to ramp up production efficiently. This is expected to restore and potentially improve net margins as production normalizes.
  
• Continued progress in the Nexus eVTOL program and advancements in unmanned systems at Textron eAviation suggest future growth prospects in emerging markets. While currently a loss, these investments have the potential to drive future earnings as these technologies are commercialized.
  
• The signing of a multi-year labor agreement is expected to help stabilize the workforce, thereby improving production efficiency and reducing costs. This should positively impact net margins and earnings as Textron mitigates previous supply chain disruptions.

Textron Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Textron's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $6.94) by about October 2027, up from $883.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2027 earnings, down from 17.2x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.2x.
• Analysts expect the number of shares outstanding to decline by 2.9% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Textron Future Earnings Per Share Growth

Risks

• The recent labor strike and its resulting disruption in aircraft production and services at the Wichita facilities are expected to negatively impact Textron's 2024 financial results, potentially affecting revenue and net margins.
  
• Textron Aviation's delayed aircraft deliveries and unfavorable performance due to the IAM strike have lowered quarterly segment profits and revenues, which could continue to pressure earnings if such issues persist.
  
• Textron's Industrial segment has faced lower revenues and profits due to ongoing softness in specialized vehicles end markets, suggesting a potential continuing impact on revenue and net profit in the near future.
  
• Textron eAviation and Textron Systems reported losses and slightly lower profits, respectively, compared to last year. This could impact overall earnings if these segments do not improve their performance.
  
• Textron's adjusted earnings per share have been reduced due to the strike, and manufacturing cash flow expectations have been lowered, suggesting potential risks to stakeholder returns and cash flow stability.

Valuation

• The analysts have a consensus price target of $99.27 for Textron based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $118.0, and the most bearish reporting a price target of just $79.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $16.0 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 6.2%.
  
• Given the current share price of $81.77, the analyst's price target of $99.27 is 17.6% 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.