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Why Textron Stock Popped 12.2% Today

By Rich Smith - Updated Apr 17, 2020 at 4:04PM

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A big Pentagon contract win sparks an even bigger rally.

What happened

Shares of Textron (TXT -0.06%) were up 12.2% today. No great mystery there. For one thing, most stocks were up Friday as investors cheered news that Gilead Sciences may have found a cure for the coronavirus. The S&P 500 as a whole was up close to 3% on that news. But there's also good reason for the gain in the stock of defense contractor Textron.

Textron LCAC 100 Class at sea.

Textron's LCAC 100 class. Image source: Textron Systems.

So what

Thursday night, the Pentagon's daily digest of military contract awards named Textron as the winner of a $386.3 million contract to build 15 landing craft, air cushion (LCAC) for the United States Navy. These LCACs, better known as hovercraft, are one of the means by which Marines conduct beach assaults from Navy warships. The contract in question, for construction of LCACs numbers 109 through 123, will be completed over the next roughly five years, with delivery of the final craft due January 2025.

Now what

That last detail could be key, however, to whether Textron stock will be able to hang on in the long term to the gains it's enjoying today. Even the full value of this contract modification, $386.3 million, represents just 2.8% of Textron's annual $13.6 billion revenue stream. That seems a rather thin reed upon which to be hanging a 12% gain in market cap.

And considering that the annual increase in sales from this contract is closer to just half a percentage point averaged over five years, then investors' decision to bid up Textron shares by more than 12% today seems even less logical.

Accordingly, while I applaud the sentiment, I have serious doubts investors will continue valuing Textron shares quite so highly once this realization sets in. Textron shares, which are up so strongly today, should subside and fall back in rather short order.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool recommends Textron. The Motley Fool has a disclosure policy.

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