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Textron's First Quarter Delivers More Questions Than Answers

By Lou Whiteman - May 5, 2020 at 9:31AM

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The company seems unlikely to rebound any time soon.

Textron (TXT 0.07%) misfired in the first quarter, reporting adjusted earnings of $0.35 per share on revenue of $2.78 billion. That missed analyst expectations for $0.40 per share in earnings on revenue of $2.97 billion.

Textron is hardly the only industrial company that saw its first-quarter results pressured due to the COVID-19 pandemic, and it's important not to dwell too much on this one quarterly snapshot. But for Textron investors, disappointing earnings reports have become all too common of late.

The results and post-earnings commentary provide both glimmers of hope as well as fresh reasons for investor concerns. Here is a look at the good and the bad surrounding Textron following its first-quarter report.

Glass half full: This too shall pass

Digging into the numbers, the industrial conglomerate's Bell helicopter unit posted strong sales of $823 million, up 11% year over year, with better-than-expected 14% operating margins. Bell is a key to Textron's push to add to its military business, and it has the potential to see its government sales grow substantially in the years to come should it win one or both of the two major Army helicopter competitions in which it is currently a finalist.

Textron's aviation unit, which includes Cessna and Beechcraft, was the source of a lot of the disappointment. Aviation revenue was down 23% year over year due to a dramatic decrease in deliveries, and margins at the unit were barely positive due to lower volumes and pandemic-related manufacturing suspensions.

Textron Aviation Deliveries

1Q 2020

1Q 2019

% Change









Data source: Textron.

Other parts of the portfolio were also hit by the pandemic. For example, Textron's Kautex plastics unit was stunted by automotive assembly plant closures.

The results are not good, but there is reason to hope that the numbers, like the pandemic, will be transient. If so, Textron is set up well for a quick turnaround.

Textron is expecting its aviation sales team to resume normal sales calls by the end of the second quarter and for overall flying hours to pick up pace, which would help its parts and servicing business.

Kautex historically has peaked in the second half of the year, along with new model auto production. And Bell and the company's other military businesses should be able to continue along at a steady pace.

Textron's Bell 525 helicopter on the tarmac

Image source: Textron.

Heading into 2021, Textron should benefit from pent-up demand for jets, especially since corporate fleets are older than they have been in a generation and ripe for renewal, and with any luck, those Army helicopter awards will come in and add billions to the backlog.

In the meantime, the company has ample liquidity, with $2.3 billion in cash as of quarter's end and an untapped $1 billion credit line at its disposal.

Glass half empty: Is a major growth engine about to stall?

On a post-earnings call with investors, Textron management seemed adamant that the poor showing from its business jet unit was due to short-term, pandemic-related issues, including an inability for sales professionals to get deals closed or for customers to take delivery. But it's at least possible that's only part of the problem: Business jets are a tough sell going into, and during, a recession, with overall industry sales cut in half during previous downturns.

It is at least possible that even when the pandemic is over, sales will not return. If a post-pandemic recession destroys demand, Cessna could be headed for an extended slump.

On the call, CEO Scott Donnelly conceded "this is the great unknown," and said that while he believes the dynamics today are different than in 2008, only time will tell. When the last recession hit, there had been a huge sales surge in jets in the years leading up to it, so there was a glut of near-new planes that manufacturers had to sell against. There was also political pressure not to buy jets.

As we sit here today, we just don't know. There is bull cases, there is bear cases and there is stuff in the middle, and that's -- all we're trying to do, guys, is get to a point where we can have a much better fundamental understanding of what that demand environment looks like to make decisions on how to run the business going forward.

Energy prices are another concern. The recent crash in crude will result in cheaper jet fuel, which in turn provides jet operators with one less reason to replace older jets with newer, more fuel-efficient ones during a period of uncertainty. Energy prices are also a driver of Bell's commercial helicopter business, since the oil business, and offshore rigs in particular, are major operators of helicopters.

Textron in recent years has posted disappointing earnings because the company was unable to get all of its different businesses firing at the same time. Up ahead, there appear to be multiple ways things can go wrong for various Textron units, which, if nothing else, should temper any investor optimism.

The wait will continue

Textron has been a stock in need of a catalyst for a long time now. The company has tried to be opportunistic; for example, earlier this year, it unsuccessfully pursued a deal that would have bolstered its aviation unit. But it hasn't all come together for the company, and investors have every reason to be losing patience.

TXT Chart

TXT vs. S&P 500 data by YCharts.

It is impossible to know whether the company's businesses will recover heading into the second half of the year, but there's enough uncertainty, and enough of a recent track record, to be concerned. Absent some sort of quick turnaround, it would not surprise me to see an activist investor get involved in Textron, either demanding a breakup of the conglomerate or at least spinning off specific units.

There is still a lot to like about this portfolio of assets, but for a while now, the stock price has been less than the potential of the parts. Textron's first-quarter earnings report provided little evidence to suggest that will change any time soon.

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