Textron Inc: Earnings Analysis Versus Competitors

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Textron Inc: Earnings Analysis Versus Competitors

Textron Inc. (NYSE:TXT) reports preliminary financial results for the quarter ended 2012-09-30.

Textron Inc. (NYSE:TXT) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Textron Inc.’s analysis versus peers uses the following peer-set: The Boeing Company (NYSE:BA), Lockheed Martin Corporation (NYSE:LMT), European Aeronautic Defence & Space Co. EADS N.V. (EPA:EAD), General Dynamics Corporation (NYSE:GD), BAE Systems plc (LON:BA) (PINK:BAESF), Dassault Aviation SA (EPA:AM), Bombardier, Inc. (TSE:BBD.B), Embraer SA (NYSE:ERJ), Finmeccanica SpA (BIT:FNC) and Korea Aerospace Industries Ltd.(047810). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 3,000.0 3,019.0 2,856.0 3,254.0 2,814.0
Revenue Growth % (0.6) 5.7 (12.2) 15.6 3.2
Net Income 142.0 173.0 120.0 (17.0) 136.0
Net Income Growth % (17.9) 44.2 N/A (112.5) 47.8
Net Margin % 4.7 5.7 4.2 (0.5) 4.8
ROE % (Annualized) 17.7 23.0 17.0 (2.2) 16.8
ROA % (Annualized) 4.3 5.3 3.6 (0.5) 3.6

Valuation Drivers

Textron Inc.’s current Price/Book of 2.2 is about median in its peer group. The market expects TXT-US to grow faster than the median of its chosen peers (PE of 18.8 compared to peer median of 13.5) and to improve its current ROE of 12.6% which is below its peer median of 16.1%. Thus, the market seems to expect a turnaround in TXT-US’s current performance.

The company’s profit margins are below peer median (currently 3.4% vs. peer median of 5.7%) while its asset efficiency is about median (asset turns of 0.9x compared to peer median of 0.8x). TXT-US’s net margin continues to trend upward and is above (but within one standard deviation of) its five-year average net margin of 2.3%.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 7.1% and better than peer median earnings growth performance 163.0%. TXT-US currently converts every 1% of change in annual revenue into 22.9% of change in annual reported earnings. We view this company as a leader among its peers.

TXT-US’s return on assets is less than its peer median currently (2.9% vs. peer median 4.2%). It has also had less than peer median returns on assets over the past five years (1.7% vs. peer median 3.2%). This performance suggests that the company has persistent operating challenges relative to peers.

The company’s gross margin of 19.3% is around peer median suggesting that TXT-US’s operations do not benefit from any differentiating pricing advantage. In addition, TXT-US’s pre-tax margin is less than the peer median (5.0% compared to 7.7%) suggesting relatively high operating costs.

Growth & Investment Strategy

While TXT-US’s revenues have increased more slowly than the peer median (-7.5% vs. 2.9% respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 18.8. The stock price may be factoring in some sort of a strategic play.

TXT-US’s annualized rate of change in capital of -14.6% over the past three years is less than its peer median of -3.5%. This below median investment level has also generated a less than peer median return on capital of 1.1% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Earnings Quality

TXT-US reported relatively weak net income margins for the last twelve months (3.4% vs. peer median of 5.7%). This weak margin performance and relatively conservative accrual policy (3.2% vs. peer median of 1.5%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

TXT-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Graph of Revenues Trend for Textron Inc. (NYSE:TXT)
Graph of Revenues Trend for Textron Inc. (NYSE:TXT)
Graph of Net Margin Trend for Textron Inc. (NYSE:TXT)
Graph of Net Margin Trend for Textron Inc. (NYSE:TXT)
Graph of Accruals Trend (% revenues, Quarterly) for Textron Inc. (NYSE:TXT)
Graph of Accruals Trend (% revenues, Annual or TTM) for Textron Inc. (NYSE:TXT)

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