Textron: A Manufacturing Conglomerate Making Selective Bets on the Industry’s Future; $80 Fair Value

We have initiated coverage of Textron TXT with an $80 fair value estimate making the shares fully valued at recent prices. We don’t believe Textron has an economic moat, but we have our eye on its military helicopter and tilt-rotor business, which could emerge in a decade or so as a pre-eminent supplier of military rotorcraft and may lift the company’s returns and prospects for durable profit into moatworthy territory. But not yet.

Textron’s track record of producing some of the most popular products in their class, like the Cessna Caravan and the Huey helicopter is impressive. However, these categories are competitive enough that the firm has not engendered intangibles or switching costs sufficient to generate returns in excess of its cost of capital.

Aside from its previous investments in tilt-rotor aircraft and midsize business jets, which seem to be paying off, we note the firm positioning its portfolio for a more electric vehicular future. In 2022, Textron acquired Pipistrel, a small maker of electrically powered propeller planes. Textron is far from alone in investing in this emerging portion of the aviation market, but for Textron, it could play a more strategic role. Its renamed “eAviation” segment is tiny, and will not be profitable for the foreseeable future as the firm researches and develops new electric aircraft in addition to its existing Velis model. On a passenger-mile basis, small planes are far less fuel and carbon-efficient than larger ones, so given Textron’s existing product footprint in small planes and the potential shift in demand toward less carbon-intensive vehicles, we think the investment makes sense for Textron and may allow it to eventually profit from disruption in its biggest category.

Vehicle electrification already plays a role in Textron’s industrial segment, where Kautex, which mostly makes plastic fuel tanks for cars and represents approximately 13% of Textron’s revenue, may face overcapacity as electric vehicles gain market share.