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Textron businesses
Last August I recommended the purchase of Textron Inc. (NYSE:TXT), saying that it would outperform the Standard & Poor’s 500 index. It did outperform the index, which has declined while Textron maintained its stock price. I anticipate that the stock price will now increase, not just beat the index.
The performance of Textron businesses for the last two years is compared to the projection for 2022 as summarized below.
| Textron Revenue | ||||||
| $ Billion | ||||||
| ANNUAL | GROWTH | |||||
| 2020 | 2021 | 2022 Proj. | 2021 | 2022 Proj. | ||
| Aviation | 4 | 4.5 | 5.5 | 15% | 20% | |
| Bell | 3.3 | 3.3 | 3.4 | 2% | -11% | |
| Systems | 1.3 | 1.3 | 1.3 | -3% | 2% | |
| Industrial | 3 | 3.1 | 3.5 | 4% | 12% | |
| TL Revenue | 11.6 | 12.3 | 13.3 | 6% | 8% | |
| Memo | ||||||
| EPS | 1.35 | 3.30 | 3.80-4.00 | 144% | 15%-21% | |
Table by Author
Textron’s earnings in 2020 were $1.35 a share, while it anticipates 2022 earnings of four dollars a share. 2021 showed a recovery from the pandemic. Share repurchases in 2021 totaled $921 million. Management anticipates a similar repurchase this year. In 2021 military was 26% of sales.
Aviation
The largest Textron segment is Aviation, which Textron projects at $ 5.5 billion in 2022, up from $4 billion in 2020. The aviation order backlog increased from $2.5 billion in 2021 to $4.1 billion.
If Textron has a short backlog, they end up modifying existing aircraft. This causes difficulties getting the right electronics interiors and other items. Textron ran lower deliveries in the fourth quarter of 2021, in part because it wanted to move to a one-year production cycle. Revenue was $1.4 billion, down $201 million over the prior year, but profits were up $29 million on pricing and increased manufacturing efficiency.
Aviation includes Cessna, which makes small light aircraft as well as jet private aircraft. Beechcraft makes light aircraft and turboprops. Currently, the market for general aviation is hot and margins are improving. The Aviation Segment includes ground support equipment and piston aircraft engines.
Growth
Research and development in 2022 should total $585 million. However, this does not include military-funded research and development. It only includes Textron’s share of projects that are developed with military funds.
Textron plans to spend $30 million on electric-powered aircraft. The company believes it has the advantage of already specializing in light aircraft and helicopters, the types that are usually electrified, so they can concentrate on batteries and other design features for electric aircraft. In March, Textron announced the acquisition of Pipiwtrel, a European product of light electrically powered aircraft that is fully certified by the European aircraft agency. In addition, the company has a contract with General Motors (GM) to use GM electrical technology for the manufacture of ground support equipment.
Textron is continually updating its product lines. This can be a small change, such as upgraded piston engines and electronics on legacy piston airframes, to entirely new executive jets such as the Citation Latitude, which entered NetJets service with a 200 plane order, and the Citation Longitude. Textron is currently developing the Beechcraft Denali, which will use a newly developed GE turboprop. It is a single-engine aircraft that will replace twin-engine turboprops.
Bell
Bell produces both commercial and military helicopters. The largest current military project in production is the V 22 Osprey which is manufactured in conjunction with Boeing. Textron has spent eight years developing the 525 helicopter, which it expects to certify this year. It is a 19-passenger commercial helicopter. Lockheed-Martin’s Sikorsky division is dropping out of this market, so this increases the market for this aircraft.
Bell is bidding on two large military contracts. The first one is the future attack reconnaissance aircraft (FARA). The 525 helicopter is the basis of Bell FARA aircraft. A contract for this aircraft is expected to be let about mid-year. It is competing against the Sikorsky division of Lockheed Martin. It is very difficult to predict the success or failure of a military contract bid. The project manager has stated that the only way either competitor can provide a machine that meets specifications is if the laws of physics are repealed. The Army desperately wants new helicopters because, even if the stretch specifications can’t be reached, the projects are far superior to what’s available now. Both RARA competitors will use a new engine that is 20% more fuel-efficient and 25% more powerful, with new electronics, a new cannon, and other equipment.
The army has had a poor record of getting new helicopters approved. With the higher defense budget following the invasion of Ukraine, the chance of program acceptance is much higher for both projects.
About 3 to 4 months after this contract is selected, the contract for the future long-range attack helicopter (FLRAA) will be let. Bell is competing with Sikorsky/ Boeing on this project. This is a larger contract which could result in 2000 to 4000 units over its lifetime. This aircraft is a replacement for the Sikorsky Black Hawk which replaced the Vietnam-era Bell Huey. Winning either of these contracts is obviously important and increases the long-term value of the winner.
However, it will be a long time before highly profitable production will occur on either aircraft. In both contracts, each competitor is making a product demonstrator. The winner then must turn that into a final design prototype which enters long-term testing followed by low-level production. Thus, these contracts are vital in the late 2020s but are more prestige than earnings-driven currently. While these contracts are very important, there are other smaller military contracts, particularly for the Navy and Marine Corps
Systems
Systems produce air cushion vehicles that are used as landing craft and amphibious operations and other projects such as drones for destroyers. It also provides support to military operations. In 2021, systems revenue dropped substantially when the need for support diminished after the Afghan withdrawal.
Industrial
The industrial business produces snowmobiles, golf carts, and parts for automobile production. The small vehicle business is recovering well from the pandemic and sales and profit margins are increasing, but these operations profits are relatively low compared to the other businesses.
Stock Price
Textron projections tend to be conservative They beat last year’s earnings per share. Price realization, manufacturing efficiency, and R&D tax credit appear to be overly conservative. The risk would be on the schedule for military contracts.
The RARA product demonstrators are about 80% complete. The engines will not be delivered until November. The Army project managers plan on selecting the winner based on a program review without a flying demonstrator. That may not be acceptable, and the contracts could slide into 2023. A large contract that stretched into the next decade will make the future more stable and raise the P/E. That may not happen in 2022, though.
Risks and opportunities
General Aviation is hot now in part because of issues with the airlines. As airlines recover from the pandemic, general aviation growth could decline. The current order backlog is 80% of annual aviation sales, which protects against this risk. If Textron both loses military contracts in 2022, its performance would be hurt. Management is very conservative on Aviation. The profit from this segment is likely to be above projection, creating an opportunity.
Conclusions
Textron’s spending for product development, acquisitions, and stock buybacks is unusually high, which generates high-profit growth for shareholders. The stock should go up along with projected earnings per share of 15 to 20 percent. It is a strong buy.
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