Textron (TXT -0.96%) shares have underperformed the market by more than 50 percentage points over the past three years, weighed down by operational issues in various segments of the industrial conglomerate.
The company's third quarter was notable for its lack of drama, indicating that perhaps the worst over. On Nov. 5's Motley Fool Live, contributor Lou Whiteman discussed the quarter with "The Wrap" host Jason Hall, highlighting some catalysts heading into 2021 that could get investors excited about owning the stock again.
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Lou Whiteman: Textron reported last Friday, but my power was out, so we're going to talk about it now. This is for those who don't know. An industrial conglomerate, they make everything from snowmobiles, to business jets, to golf cards, to helicopters, to a whole range of other things.
Jason Hall: Ticker is TXT, right?
Lou Whiteman: Yes. TXT. Like you say, this is a Stock Advisor recommendation, one of the poor performing one. I don't know exactly. I think it's maybe down 16, 17 percent since the recommendation.
Jason Hall: The market is probably up 70 percent since.
Lou Whiteman: Right. I can tell you for the year, that it's still down about 13 percent, losing to the S&P 500 by maybe 20 percentage points or so, off 30 percent over just the last three years. This is a conglomerate. They're in a lot of different businesses and it's almost been like a keystone cops show. Every quarter, there was something wrong somewhere and it was always at a different place. It felt like management was just putting out a fire and another one was coming up. We had a series of earnings misses, a series of maybe next year, and investors don't tend to stay around for this. But last week, they released third quarter earnings and they actually beat, a solid beat. They have earned 53 cent per share, Wall Street was expecting 35 cent. That's a very different story for them. Yes, sure, some of it was a lower tax rate. But there wasn't a lot of drama in the quarter, which for Textron, as an industrial, that was very refreshing to see. We still have issues. COVID is making things very uncertain for business jets and they really need Cessna to be strong. But their book-to-bill was 1.5x. That means they brought in 1.5 times the business that they build out. That is a sign of growth, and for this time of year, that is surprisingly good. It is hard to find a third-quarter book-to-bill in business jets, if you go back the last 10 years, that was over 1.0. That tells me that there's something there, which we are 10 years since the replacement cycle, fleets are aging. There is pent-up demand there. So we have Cessna as a potential catalyst. The company's Bell unit, the old Bell Helicopter out of Texas, is vying for two very big multibillion-dollar Army awards. I think they will hold up regardless of who's in the White House. I honestly think it's too soon to say, but I would be shocked if Bell doesn't win one of them worth upwards of $40 billion to replace the Blackhawk. We're not going to know about that till late 2021. We're not going to see deliveries till 2023. It's a long way to wait on the stock. You've already waited a long time, if you're in it, but with Bell and Cessna, for the first time in a long time, there's reasons to get excited. There's real catalysts on the future. So there is at least reason for hope in a stock that really is missed out on an aerospace party pre-COVID and was really a dog of this sector for a long time.
Jason Hall: Yeah. The company recently announced, correct me if I'm wrong, they're cutting some costs in the Cessna group, right? They're really trying to bring their head count down.
Lou Whiteman: Yeah. This has been a whole series of things and and I will be honest too, they have big competitors in this. Bombardier up in Canada has had a lot of trouble. I really like the General Dynamics unit, Gulfstream. Fortunately, I think there's room coming into this market for a lot of sales because again, you really have to go back to before the economic meltdown to see business jet sales. You have a lot of corporate fleets that are aging. I think everyone wins here eventually. But COVID is yet another twist in what has really been a tough tail for this company and for the business jet market in general.
Jason Hall: The when is the key. That's the thing we don't know. Lou, thanks for that.
