Analyst Note| Burkett Huey, CFA |
No-moat-rated Textron reported a strong first quarter as it starts to show operating leverage with the recovering economy. We hadn’t given the firm enough credit for the structural cost takeout measures it enacted during the pandemic, and we’re raising our fair value estimate to $42 per share from $39 as we increase our midcycle margin to 9.0% from 8.4% to reflect the improved cost structure. However, the shares still look pricey currently. We think the market is either pricing in Textron winning both Future Vertical Lift contracts over the Boeing-Sikorsky team, which would add a structural 4%-5% to the top line by our estimates, or pricing in margin expansion to a midteens level. We think it’s imprudent to price in Textron-Bell winning both contracts in a base-case scenario, given the stiff competition, and we would like to see more evidence of the magnitude of cost takeouts before giving the firm credit for it. Sales came in at roughly $2.9 billion and the firm delivered earnings per share of $0.70, which beat FactSet consensus by 5.4% and 49.6%, respectively.