Textron Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Textron Inc. is a diversified industrial company providing a wide range of products and services across the aviation, industrial, and finance sectors, often with significant exposure to government contracts.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Textron’s diverse nature, while a strength in some aspects, also makes it a bit complex to understand, leading to a moderately low Understandability score. Also, they have significant exposures to macroeconomic conditions which is a negative for the company.

Business Overview

Textron operates across three main business segments:

  1. Textron Aviation: Designs, manufactures, and sells a variety of general aviation aircraft, including Beechcraft and Cessna brands. This segment is the core of Textron, both revenue and profitability wise.
  2. Bell: A leading player in military and commercial rotorcraft manufacturing. They mainly manufacture military helicopters for the US government.
  3. Textron Systems & Industrial: Offers a diverse range of industrial products, such as specialized vehicles, armored vehicles, and other equipment. The Textron Systems portion also includes various defense related product offerings. The Finance portion provides lending for Textron’s product buyers.

Textron has a significant relationship with the U.S. government, this exposure may lead to both predictable revenues but also to regulatory and political risks.

Revenues Distribution

Textron’s revenue is diversified, with about 30% coming from their aviation segment, about 30% from its Bell segment, and the rest 40% from their industrial and finance sector. However, because the company operates in varied industries it is not easy to do peer comparisons, which is a negative.

The aerospace and defense industries are facing increased interest in automation and digital transformation, a push towards sustainable practices, and supply chain disruption that creates challenges but also opportunities to grow for companies such as Textron. For the industrial side, growth is more related to global economic growth and spending, creating volatility, and a need to carefully manage capital spending.

Textron is highly dependent on economic growth. Any downturn in the economy would have considerable impact on the company’s profits.

Margins

  • Gross margins range from the low teens to over 30 percent, depending on the segment, but overall, they’ve shown a good level of consistency over the last few years.
  • Operating margins are very sensitive to the volumes, as can be seen in the recent reports with declines in aviation, they usually vary between 10% and 15%.
  • Overall, Textron has high operating leverage, which means that even small changes in sales volumes can impact the bottom line by a large degree.

Competitive Landscape

  • Aviation: Textron Aviation competes with a variety of players, ranging from large aerospace companies like Boeing and Airbus, to more specialized manufacturers of private jets, like Bombardier and Gulfstream. The level of competition is intense.
  • Bell: Bell primarily sells to military and government entities, where relationships and having winning bid are the main factors. The competitive landscape here is less related to cost than to capabilities of products offered.
  • Textron Systems and Industrial: This segment is very diversified, and the competitive landscape will vary. However, given the products are not of a specialized nature, they do have considerable competition from similar players.

What Makes Textron Different

  1. Diversification: Unlike pure-play aerospace companies, Textron’s diversified portfolio is a positive thing as it can mitigate risks across sectors, but it also can lead to lack of focus.
  2. Strong Government Relationships: Textron has strong relationships with governments for military, security, and transportation-related projects, which bring in steady revenues, but make them prone to government regulation risks.

Financials

  • Revenue: The latest quarterly results indicate flat revenue on a YoY basis for the overall company, while aviation is down, it was largely compensated by growth in other sectors. As a general trend, Textron revenue grows relatively slowly and is highly dependent on the global macro conditions.
  • Margins: Latest reports show that the aviation segments margins have suffered the most, but other sectors have shown some strength. The margins are quite volatile and are usually highly dependent on the volumes being produced and sold.
  • Earnings per share: EPS have improved during the last couple of years, but that mainly driven by revenue growth and aggressive share repurchases done by the company.
  • Debt: A debt-to-equity ratio around 1.0 is healthy and in-line with peers and the company has a large debt, which is understandable for a capital-intensive business.
  • Cash: Management has made a lot of share repurchases and has been using a lot of cash generated for the purpose. The cash position isn’t very strong.
  • Dividends: The company currently has an annual dividend of 2%, with a payout of 10%. The payout is quite low, and there is a possibility that the company has higher priorities of capital allocation, such as buybacks, M&A, etc.

While financial ratios are healthy, their debt seems high, cash position low and the focus on aggressive buybacks is something investors need to watch out for.

Moat Rating: 2 / 5

Textron exhibits a narrow moat, primarily deriving from:

  • Brand Recognition in Aviation: Cessna and Beechcraft are well-known brands in the aviation market and this helps them to attract customers.
  • Extensive Distribution Networks: Especially in their aviation business.
  • Government relationships: This provides some predictable and repetitive business, mostly for their Bell division.

These competitive advantages are not impenetrable, however:

  • Their other divisions have a lot of competition that can easily replicate their product/service offerings and compete on pricing.
  • The technological risk is high. Technology has been shifting to electric, hybrid, or other innovative technologies, and unless Textron can innovate effectively it is going to become irrelevant.
  • They are subject to various macro conditions, both economic and political.

Understandability: 3 / 5

Textron’s structure is fairly complex given its multiple segments and operations that span from civil to defense sectors, and thus difficult to understand, but because the business models are not very difficult, it earns a mid-level ranking on understandability.

Balance Sheet Health: 4 / 5

While the company has a decent amount of debt, the ratios like current ratio, debt-to-equity are in-line with sector, which shows relatively healthy position. The company, however, does not have enough cash, which is a negative.

Risks to the Business

  1. Economic Downturn: Given the dependency on customer spending and global economic activity, a recession or slowdown would impact revenues and profits considerably.
  2. Political and Regulatory Risk: The company has considerable amount of revenue from military and defense contracts with the government, which can change from time to time depending on budget allocation.
  3. Technological Disruption: Shifts toward new aircraft technologies, electric aircraft, and automation could render some of Textron’s current products less competitive.

Management’s Take on Recent Challenges

During the latest earnings call, management mentioned that revenue was flat from the previous year despite volume decreases, partially due to price increases. Also, their profitability saw some headwinds from increased material cost and supply chain issues, but the company’s management mentioned that they are working hard to mitigate such issues. They also reiterated that all their long-term contracts are still strong.

Despite the flat performance, the company mentioned that they expect growth in their earnings and revenue, with the growth being led by increased demand for new aircraft, and the defense sector being robust due to the geopolitical instability. But they expect this to be a longer-term trend and are not expecting growth in 2024 to be substantial.

The management also mentioned they are working hard to improve margins by increasing efficiencies and reducing cost. The company also mentioned that the current priority is to make sure they are a top performer in all their businesses and provide value to their customers and shareholders.

They also mentioned that they are continuing with their aggressive capital deployment strategy by buying back their shares.