Textron Stock Appears To Be Modestly Overvalued

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GF Value
Apr 17, 2021
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The stock of Textron (NYSE:TXT, 30-year Financials) is estimated to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $58.54 per share and the market cap of $13.3 billion, Textron stock is estimated to be modestly overvalued. GF Value for Textron is shown in the chart below.

Textron GF Value Chart

Because Textron is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 0.11% annually over the next three to five years.

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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Textron has a cash-to-debt ratio of 0.52, which ranks in the middle range of the companies in Aerospace & Defense industry. Based on this, GuruFocus ranks Textron's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Textron over the past years:

debt and cash

Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Textron has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $11.7 billion and earnings of $1.35 a share. Its operating margin is 4.39%, which ranks in the middle range of the companies in Aerospace & Defense industry. Overall, the profitability of Textron is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Textron over the past years:

Revnue and Net Income

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Textron's 3-year average revenue growth rate is in the middle range of the companies in Aerospace & Defense industry. Textron's 3-year average EBITDA growth rate is -10.7%, which ranks worse than 73% of the companies in Aerospace & Defense industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Textron's return on invested capital is 4.65, and its cost of capital is 10.74. The historical ROIC vs WACC comparison of Textron is shown below:

ROIC vs WACC

To conclude, the stock of Textron (NYSE:TXT, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 73% of the companies in Aerospace & Defense industry. To learn more about Textron stock, you can check out its 30-year Financials here.

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