3 Reasons to Avoid TXT and 1 Stock to Buy Instead

Textron trades at $90.50 and has moved in lockstep with the market. Its shares have returned 14.9% over the last six months while the S&P 500 has gained 12.9%.

Is now the time to buy Textron, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is Textron Not Exciting?

We're cautious about Textron. Here are three reasons we avoid TXT 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. 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 sluggish 3.4% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.

2. Slow Organic Growth Suggests Waning Demand In Core Business

Investors interested in Aerospace companies should track organic revenue in addition to reported revenue. This metric gives visibility into Textron’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Textron’s organic revenue averaged 3.4% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Textron’s margin dropped by 5.6 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 5.1%.

Final Judgment

Textron isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 13.7× forward P/E (or $90.50 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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