Investors have been waiting for Textron (TXT 0.78%) to get all its different businesses on track at the same time. Shares have been underperforming the S&P 500 over the past year due to misfires and product delays.
The market finally got the results it was looking for in the first quarter of 2019, causing shares to spike higher. Textron reported earnings of $0.76 per share, beating consensus estimates by $0.08 per share despite a slight miss on revenue, thanks to stronger-than-expected margins.
Textron, a maker of everything from snowmobiles to military helicopters and from golf carts to business jets, has always been a difficult company to get a read on. Last fall, for example, Textron shares fell more than 10% post-earnings due to weaker-than-expected sales and higher rebate reserves in its snowmobile and all-terrain vehicle segment.
TXT vs. S&P 500 data by YCharts.
The outlook for the entire portfolio is a lot healthier now than it was just six months ago, but the shares remain down 13% over the past year. It's time for investors to take a long look at what Textron has to offer.
Improvements everywhere
The star of this quarter was aviation, which posted sales up 12% year over year on strong deliveries and an operating margin of 9.3%, much better than last year's 7.1%. The company saw strength across the board, delivering 44 business jets compared to 36 in the first three months of 2018, 21 Cessna Caravans compared to 12 last year, and 23 twin turboprop Beechcraft King Airs (up from 17).
Textron's Citation Longitude. Image source: Textron.
The Bell helicopter division generated mixed results, with revenues down 2% year over year on lighter deliveries, but margins, at 14.1%, were 200 basis points ahead of estimates on a stronger mix of military deliveries and better efficiency. Bell finished the quarter with a backlog of $6.3 billion and a book-to-bill ratio of 1.62. However, with the rest of the year expected to be heavy with commercial and not military deliveries, the full-year margin is likely to settle at or around the 12.5% guidance the company has set.
The industrial segment, the source of the issues last year, has stabilized. Revenue was down from last year due to the company's disposition of its tools and testing business, but company officials said that efforts to realign manufacturing and reduce costs in its specialized vehicle business are beginning to show results. Textron is also expanding sales channels for those vehicles, introducing inventory to Bass Pro Shops and Cabela outdoors stores.
There's still room for improvement in industrials, but unlike last year when a poor performance there was enough to cause the company to miss estimates, the recent stabilization plus strong results from aviation and helicopters carried Textron to a quarterly beat.
Lots in the pipeline
The most impressive aspect of aviation's strong quarter was that Textron was able to generate strong delivery numbers despite offering a somewhat dated portfolio. Cessna's Citation Longitude midsized business jet, an updated design that was supposed to drive revenue gains in 2019, is still awaiting certification after a series of delays, including January's partial government shutdown.
Analysts have worried that, with the U.S. Federal Aviation Administration currently focused on Boeing's 737 MAX issues, further certification delays are possible. But Textron CEO Scott Donnelly, on a call with investors following the earnings release, said he expects deliveries to begin in the second half of the year.
"The production line is humming along, it's a great product that continues to fly really, really well, and we'll get there," Donnelly said. "The only disappointment frankly for us is we have customers who want the aircraft and we've been trying to do everything we can to support training and readiness for deliveries and all those kinds of things."
Aviation reported order levels up 12% from a year prior and ended the quarter with a backlog of more than $2 billion, up $204 million from year's end. Certification should also help on the expense side, as working capital was unexpectedly high in the first quarter due, in part, to inventory builds related to the Longitude.
On the military side, Textron will soon see production of the V-22 Osprey wind down, at least for U.S. customers, though Donnelly mentioned the potential for sales to foreign militaries and continued U.S. maintenance and aftermarket support for the V-22 to argue that the program could still be a contributor well into the future.
Artist rendering of Bell's V-280 Valor. Image source: Textron.
Textron has high hopes for its V-280 Valor, a tilt-rotor aircraft similar to the Osprey that is one of two demonstrators participating in an Army program to help define future vertical-lift designs. And it should have steady work building the Navy's Ship-to-Shore Connector hovercraft, a $4 billion-plus program that received a total of $665 million in appropriations in the last three Pentagon budgets, to bridge any production gap between the V-22 and a potential V-280 order.
The company's drone business is also one of two finalists in a competition to supply the Army with its next-generation scout drone, a potential $2 billion contract.
These shares can soar
The one disappointment in Textron's first quarter was that the company didn't raise its full-year guidance, sticking with its previous estimate of between $3.55 and $3.75 per share in earnings in 2019. I believe management is attempting to be conservative, given the lingering uncertainty surrounding timing on the Longitude certification and mindful of the market's reaction last fall to a miss. However, if deliveries of the new jet commence early in the third quarter as hoped, I expect Textron to easily come in ahead of its current projections.
Textron management also said they could have upwards of $800 million available for buybacks this year, which could reduce the total share count and boost the earnings-per-share number.
There's still some uncertainty on the military side, including what becomes of the V-280, how quickly the Navy wants to buy the Ship-to-Shore vessels, and ongoing drone competitions. But with Textron trading at just 11.2 times earnings, near its low over the past 10 years and significantly below the multiples applied to top industrials including United Technologies (20.9 times), Honeywell (18.8 times), and business jet rival General Dynamics (15.6 times), it appears very little of that potential business is priced in at this moment.
For the first time in a couple of years, every business inside Textron is performing to plan, and most offer the potential for upside well into 2020. This is a great time to take a look at Textron shares.
