Over the past six months, Textron has been a great trade, beating the S&P 500 by 10.1%. Its stock price has climbed to $92.42, representing a healthy 12.4% increase. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Textron, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Textron Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Textron. Here are three reasons why TXT doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Textron grew its sales at a tepid 4.9% compounded annual growth rate. This was below our standard for the industrials sector.
2. Recent EPS Growth Below Our Standards
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Textron’s unimpressive 4.5% annual EPS growth over the last two years aligns with its revenue trend. This tells us it maintained its per-share profitability as it expanded.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Textron’s margin dropped by 3.4 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Textron’s free cash flow margin for the trailing 12 months was 6.3%.
Final Judgment
Textron isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 14.4× forward P/E (or $92.42 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Textron
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