After a sizeable post-election rally, Textron shares are down today on some disappointing results. We’ll let others summarize the quarter, and will note that our thesis necessitated an “attractive valuation” to “provide a bit of cushion through what should be some near-term volatility in results.”
We aren’t in TXT for 2017 at all. We are in TXT for out year catalysts. Defense product growth, which really gets started with the ship to shore connector in 2018, has the potential to reshape the company.
Tax reform could drive significant growth in private aviation. Consider the demand impact for private aircraft of corporate and partnership tax rates dropping to around 20%. That type of change is core to proposed tax reform by current administration and congressional leadership. If tax reform is passed, the length of the production backlog would likely supplant weak pricing as the key industry challenge.
Why should Textron yield on price ahead of that sort of demand catalyst? One could view holding the line on pricing as a strategic move ahead of a key demand driver. Improved oil & gas demand has improved orders at Bell, with the inflection likely now past.
As we see and understand it, the Scorpion is DOA and Arctic Cat is an unneeded distraction (although, it could turn out to be a very reasonably priced deal). We would rather the company focus on core product development and divest the Industrial businesses.
For investors, the long-term benefit of STS, FVL, drones and tax reform driven demand in the Aviation segment among other factors, is likely to swamp these minor issues. The outlook should be revised quite quickly in the event a retroactive tax reform is passed, and orders for Bell improved notable in the quarter with Aviation’s book-to-bill remaining reasonably healthy.
Upshot: Few companies in our coverage have the degree of favorable exposure to a shift in policy under the Trump administration that Textron does. The company has visibility into many significant programs and policy changes, and our thesis is not based on 2017 results. We continue to think investors will be rewarded for tolerating near-term volatility from current levels.
