EUR 850.00 For Business Accounts Only

Morningstar | Textron Is Investing Heavily and Starting to Clean up Its Portfolio of Disparate Businesses

Textron makes a wide array of products that include business jets, piston and turboprop aircraft, civil and military helicopters, unmanned aircraft, military munitions, motorized aircraft tugs, recreational and golf vehicles, electrical transmission products, simulation and training solutions, and electrical test equipment. Management organizes these businesses in four segments: Textron Aviation, Bell Helicopter, Textron Systems, and industrial. The Aviation and Bell segments are the largest, accounting for 34% and 22% of our forecast 2018 revenue, respectively. The company also operates a captive finance arm.The financial crisis hit Textron hard because of its business jet exposure and the size of its finance arm. Textron's finance portfolio grew to over $8.6 billion in receivables. In response to the downturn and its deteriorating portfolio of assets, the company scaled back its finance arm, which now only supports Textron sales. We appreciate the focus on the industrial business and applaud the recent move to divest the $470 million tools and test equipment business. However, we think Textron still has its hands full: Bell is developing the 525 helicopter for commercial customers and the V-280 for the U.S. military; the company is launching the Longitude business jet and is working on two new turboprops; management is also self-funding a military attack aircraft (Scorpion); and the company continues to pursue mergers and acquisitions, as demonstrated by its acquisition of Arctic Cat in 2017. On one hand, the returns on many of these investments could be significant. On the other hand, Textron faces a soft but improving helicopter market and business jet demand has only recently picked up. The company will likely experience idiosyncratic headwinds in defense such as V-22 production decreases, H-1 ramping down toward the end of this decade, and the end of Sensor Fuzed Weapon production. This leads to a fairly wide spread between our bull and bear cases and a high uncertainty rating on our valuation, but investors willing to bet on success could be rewarded. In our base case, we assume some, but not all, investments will generate excess returns for shareholders.