Textron has had an impressive run over the past six months as its shares have beaten the S&P 500 by 5.5%. The stock now trades at $93.00, marking a 13.4% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Textron, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Textron Not Exciting?
Despite the momentum, we're sitting this one out for now. 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 sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Textron’s sales grew at a tepid 5.3% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Textron’s revenue to rise by 3.7%, close to its 5.3% annualized growth for the past five years. This projection doesn't excite us and suggests its newer products and services will not catalyze better top-line performance yet.
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 4.4 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 5.8%.
Final Judgment
Textron isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 13.9× forward P/E (or $93.00 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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