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Over the last six months, Textron shares have sunk to $76.51, producing a disappointing 11.1% loss - worse than the S&P 500’s 1% drop. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Textron, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Textron Not Exciting?
Even with the cheaper entry price, we're swiping left on Textron for now. Here are three reasons why you should be careful with TXT and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
We can better understand Aerospace companies by analyzing their organic revenue. This metric gives visibility into Textron’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Textron’s organic revenue averaged 3.9% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Textron’s revenue to rise by 6.8%. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below average for the sector.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Textron’s margin dropped by 5.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Textron’s free cash flow margin for the trailing 12 months was 4.1%.
Final Judgment
Textron isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 12.2× forward P/E (or $76.51 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.