Textron Inc. Poised Evenly - Analyst Blog

On May 23, we have issued an updated research report on Textron Inc. TXT. The aerospace and defense firm continues with its systematic inorganic growth initiatives along with expansion of product and service portfolio. However, the U.S. budget deficits and political uncertainty, and higher level of competition for different product lines might challenge the company's future performance.

Textron, a Zacks Rank #3 (Hold) stock, reported unfavorable results in first-quarter 2014. In the quarter, the company's earnings per share and revenues lagged the Zacks Consensus Estimates and decreased year over year. Lower contribution from the Bell and Textron Systems divisions primarily led to weak performance.

It is evident from past records that Textron continues to pursue a strategic acquisition program. The company generally acquires assets having the same line of business, which are instantly accretive. Year to date, the company completed some significant transactions, including Beech Holdings, LLC and TUG Technologies Corp. Proper integration of acquired assets with the existing operations will enable Textron to boost its scale of operations besides realizing synergies.

Apart from following acquisition-focused growth activities, Textron is also engaged in new product development. In Feb 2014, the company unveiled its new five-seat aircraft Bell 505 Jet Ranger X at the HELI-EXPO in California. Textron expects revenue growth of about 20% and 18.5% in 2014 from its Textron System and Cessna segments respectively, on the heels of the new programs.

Currently, Textron is focusing on the Latitude, Longitude, Relentless, Jet Ranger replacement, Scorpion, and several other programs. The scheduled completion of these programs will enable the company to expand its product offering.

Textron continues to maintain a steady financial position, including a cash balance of $0.68 billion as of Mar 31, 2014. A stable financial position supports the company's acquisition strategy and new product development initiatives.

On the flip side, budget deficits and political uncertainty make the upcoming defense budgets vulnerable to cutbacks, affecting the fortunes of Textron. The company generates a major part of its revenues from the U.S. government and commercial sales. For 2014, military rotorcraft sales are expected to be lower than the 2013 level. These may negatively impact the company's future performance.

Key Picks from the Sector

Some better-ranked stocks in the industry include Embraer SA ERJ, Arotech Corporation ARTX and Huntington Ingalls Industries, Inc. HII. Embraer carries a Zacks Rank #1 (Strong Buy), while Arotech and Huntington Ingalls hold a Zacks Rank #2 (Buy).

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