High Volatility Downgrade Textron Inc. To A Hold

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Textron Inc. (TXT) operates in the aircraft, defense, industrial, and finance businesses worldwide. Its Cessna segment manufactures business jets, single engine utility turboprops, single engine piston aircraft, lift solutions, and parts, as well as maintenance, inspection, and repair services. The company has two operating segments, Bell and Industrial. TXT sells its products through a network of sales representatives, distributors, and authorized independent sales representatives, as well as directly to end users, home improvement retailers, and original equipment manufacturers. Textron Inc. was founded in 1923 and is headquartered in Providence, the Rhode Island.

RECENT NEWS

Wednesday, October 24, 12:49 PM Textron (TXT) declares $0.02/share quarterly dividend, in line with previous. Forward yield 0.32%. For shareholders of record Dec 14. Payable Jan 01. Ex-div date Dec 12.

Friday, October 19, 2:17 PM JPMorgan assumes coverage on Textron (TXT -1%) today, starting it at Overweight on the back of its Q3 earnings announcement and raised guidance reported on Wednesday. The firm says that business jet demand should slowly rebound over the next few quarters, and based on the encouraging Q3 results, it appears the company’s recent turnaround initiatives are taking hold.

Wednesday, October 17, 9:48 AM More on Textron (TXT -5.3%) Q3: net profit +6% to $151M. Revenue breakdown: Bell helicopters +20% to $1B, with 46 choppers delivered vs. 26 last year. Industrial revenue +4% to $683M. Systems, which sells UAVs and armored vehicles -13% to $400M. Cessna +1% to $778M after “very quiet ordering.” Raises EPS FY outlook to $1.95-$2.05 from previous guidance of $1.80-$2, but still below consensus of $2.10.

Wednesday, October 17, 7:19 AM Textron (TXT): Q3 EPS of $0.48 misses by $0.03. Revenue of $3M (+6.6% Y/Y) in-line.

RISKS

Textron is suffering from sluggish global growth due to reduced demand of jets or helicopters, mandatory reduction in military spending, and loan losses from borrowings. Once TXT emerges from these drawbacks, the company can expect a boost in their revenue  and EPS growth.

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic Value

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

TXT’s intrinsic value is $30 while the current price is $25.56. The stock is currently 14.80% away from its fair value.

Financials

The financial ratios of the company help us determine the firm’s financial health. The quick and current ratio should be greater than 1.30.

TXT has a quick ratio of 0.84 and current ratio of 1.72. TXT fails this criterion with the quick ratio and passes with the current ratio.

Analyst Ratings

The model assigns a value according to analyst’s recommendation for the stock. In a scale where 1 is a buy and 5 is a sell, the analyst’s mean recommendation is 2.20.

Earnings Consistency

According to this model, each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high. TXT, annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.31, 3.60, 1.94, 0.28, 0.79, this type of earnings action is unfavorable.

Total Debt to Equity

The company must have a low debt to equity ratio, which indicates a strong balance sheet. The debt to equity ratio should not be greater than 20% or should be less than the average debt to equity for its industry.

TXT’s total debt to equity of 71% is not acceptable.

EPS Change Quarter Over Quarter

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 18% that this model likes to see for a good growth company.

TXT’s EPS growth for this quarter relative to the same quarter a year earlier is 6.30% below our target.

Annual Earnings Growth

This model looks for annual earnings growth above 12%, but prefers higher than 20%.

TXT’s annual earnings growth rate over the past five years is -21.61%, and is well below our target growth.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

TXT is currently trading at -12.28% below its 52 week high and 51.96% above its 52 week low. The stock does not pass this criterion.

P/E Ratio

The price to earnings ratio, based on the greater of the current P/E or the P/E using average earnings over the last 3 fiscal years, must be moderate. This means it is not greater than 15. Stocks with moderate P/E are more defensive by nature.

The company has a P/E ratio of 10.9 the average industry P/E ratio is 17.75 times. This is above the S&P 500 P/E ratio of 17.10 times. TXT fails this criterion. The company is overvalued relative to its earnings.

Insider Ownership

When there is strong insider ownership, such as 12% or more, management is more likely to act in the best interest of the company. This is because their interests are right in line with that of the shareholders.

Insiders own only 0.12% of TXT stock. Management’s representation is not large enough. This does not satisfy the minimum requirement, and companies that do not pass this test are less attractive.

Technical Analysis

I am using several technical indicators (MACD, RSI, MFI, OBV, position indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

Our indicators give a neutral view on TXT: