Industrial Slowdown And FLRAA Delays Will Yield Cautious Aviation Recovery

Key Takeaways

• Slower Industrial revenue growth and challenges in Textron Aviation may negatively impact margins and earnings.
  
• Tariffs, global trade uncertainties, and production inefficiencies could disrupt operations and delay profit growth.
  
• Significant contracts and strong order backlog suggest stable future revenue growth, while innovation in hybrid-electric VTOL aircraft enhances long-term profitability potential.

Catalysts

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

• The slower-than-expected revenue growth in the Industrial segment due to decreased volumes and the sale of the Arctic Cat brand could lead to further revenue declines throughout the year, negatively impacting future profit margins and earnings.
  
• The decline in profit from the Textron Aviation segment, driven by an unfavorable mix of aircraft sold, suggests potential challenges in maintaining high-margin sales, which could compress net margins and earnings.
  
• The continued challenges and uncertainties associated with tariffs and global trade could lead to increased costs or disruptions for Textron's manufacturing operations, particularly in aviation, which could negatively affect earnings and net margins.
  
• Demand fluctuations and production inefficiencies in aviation due to strike recovery processes, along with a lower initial production run for the new FLRAA program, could result in lower-than-expected revenue and margin recovery, impacting overall earnings.
  
• The extended timeline for significant new product certifications, like for the Beechcraft Denali, could delay anticipated revenue streams and profit growth, leading to expectations of slower earnings growth than previously forecasted.

Textron Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Textron compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Textron's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.0% today to 7.5% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $5.95) by about April 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 bearish analyst cohort, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 15.3x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 31.7x.
• Analysts expect the number of shares outstanding to decline by 5.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.72%, as per the Simply Wall St company report.

Textron Future Earnings Per Share Growth

Risks

• Bell showed strong revenue growth, driven by an increase in both military and commercial products, indicating potential for heightened future orders and sustained income, which could positively impact revenues.
  
• Textron secured significant contracts, such as the FLRAA program, CMV-22 aircraft orders, and support contracts with the U.S. Navy, which enhance the likelihood of stable or growing future income, thereby potentially improving net margins.
  
• Aviation's aftermarket revenue grew by 6%, pointing to strong fleet utilization and consistent demand for service, which could result in more stable earnings.
  
• Textron eAviation's development in hybrid-electric VTOL unmanned aircraft suggests ongoing innovation that may lead to future revenue streams, aiding in improved long-term profitability.
  
• The backlog for Textron Aviation and Bell is sizable, valued in the billions, suggesting a stable foundation for future revenue and earnings stability.

Valuation

• The assumed bearish price target for Textron is $74.24, which represents one standard deviation below the consensus price target of $84.6. 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 more bearish 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 $63.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $14.4 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $70.37, the bearish analyst price target of $74.24 is 5.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.