Can This Aerospace Stock Provide Higher Returns Than Textron?

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shares of Textron (NYSE: TXT) The company’s aviation segment saw a strong rally in 2021 due to a jump in the order backlog. The company designs and manufactures civilian and military helicopters and business jets. With a bullish view, Trefis believes that TXT stock has reached its near-term potential. Is there a better alternative to Textron in the aerospace industry? Transdigm (NYSE:TDG) Develops highly engineered aircraft components for commercial and military aircraft. TDG stock has recovered to pre-pandemic levels and we believe there is room for more. Interestingly, Transdig and Textron’s balance sheets are comparable in size, despite the huge gap in revenue and earnings. Our interactive dashboard Textron vs Transdigm Group: Sector peers, but Transdigm Group is a better bet, Several factors such as historical revenue growth, returns and valuation multiples are highlighted.

1. Revenue Growth

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Transdigm’s growth was much stronger than Textron’s before the pandemic, with its revenue growing at an average rate of 18% per year from $3.1 billion in 2016 to $5.2 billion in 2019, aided by a series of acquisitions. . Textron’s Revenue The commercial aviation industry has remained stagnant at a relatively low $14 billion over the years due to a slowdown. TransDigm saw a top-line contraction of only 2% in 2020 compared to 15% by Textron.

  • TransDigm’s three operating segments, power and control, airframe and non-aviation, contribute 52%, 45% and 3%, respectively, of total revenue. The Power & Control and Airframe segment has seen strong growth in recent years, largely driven by demand from its defense customers. The Power and Control segment develops components such as actuators, pumps, valves, sensors, etc., which provide power to electrical, hydraulic and mechanical motion control systems. Broadly speaking, the company’s product offering is aimed at the aerospace industry.
  • TransDigm offers its products and services to the commercial OEM, commercial aftermarket and defense sectors. In the last five years, the share of the defense sector has been 30-42% of the total revenue.
  • Textron’s four operating segments, Aviation, Bell, Systems and Industrial, contribute 38%, 24%, 10% and 28%, respectively, to total revenue. The company’s aviation segment saw production bottlenecks and order cancellations due to sluggish travel demand and fall in discretionary spending during the pandemic. In recent quarters, the Aviation segment has registered a 112% growth in order backlog from $1.6 billion in Q4 2020 to $3.4 billion in Q3 2021. However, the total order backlog has seen a growth of only 3% over the same period. ,related: Will Textron Stock Continue to Drop?,

2. Returns (Profits)

TransDigm has consistently reported higher net margins than Textron — generating better earnings and cash flow.

  • In 2020, Textron’s Aviation, Bell, Systems and Industrial segments reported operating margins of 8%, 13%, 11% and 6%, respectively. While the Bell segment retained earnings during the crisis, rising demand for private jets is expected to boost the aviation segment’s profits in the coming years.
  • Similarly, TransDigm’s power and control, airframe and non-aviation segments reported operating margins of 46%, 35% and 1%, respectively. In line with top-line expansion, the company’s power & control and airframe segments are key revenue drivers.
  • While Textron has been consistently returning capital to shareholders in the form of dividends and share buybacks, Transdig has no official plans for the near term (other than a special announcement in 2019) due to long-term debt obligations.
  • Transdigm’s long-term debt obligation has grown from $10 billion in 2016 to $20 billion in 2020, aided by an in-organic growth strategy.
  • Interestingly, TransDigm and Textron have balance sheets with net assets of $18 billion and $15.5 billion, respectively.

3. Risk

According to recent filings, TransDigm and Textron reported long-term debt of $19 billion and $3 billion, respectively. Given a comparable balance sheet size, Transdig stock is a risky pick from a financial leverage standpoint.

  • High financial leverage coupled with continued revenue growth is responsible for generating surplus equity returns. Therefore, TransDigm is consistently using operating cash to invest in its business and acquire new companies to advance its growth strategy.
  • However, Textron’s stable top line and thin margins weigh on earnings and shareholder returns.
  • In 2020, TransDigm incurred annual interest expense of $1 billion and still generated net income of $699 million on net sales of $5 billion. While Textron spent $161 million in interest costs and generated net income of just $309 million on $11.6 billion of total revenue.
  • Given the strong growth prospects despite an extremely strong balance sheet, Transdig stock is likely to provide better returns to investors. (related: Air travel demand to boost Boeing stock?,

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