360 Huntington Fund @ Northeastern University

Tune in to our stock pitch of Textron (TXT). After being assigned to the industrials sector, our group had the grueling task of finding stocks in this sector that had growth potential over the next 12 months. The Industrials sector generally consisted of overvalued stocks with poor alphas. Therefore, we had a strenuous experience attempting to narrow down at least 3 options to analyze and compare. Naturally, we ended up looking into the defense industry, an industry known for its economic resilience and stability.

After looking into the financials of companies like Textron (TXT), Raytheon (RTX), and Lockheed Martin (LMT) on Bloomberg Terminal, we could immediately tell that Textron had some potential. We looked at the balance sheets, price to earnings.

Under the Textron umbrella, we discovered that they own powerful brands such as Bell, Cessna, Beechcraft, Arctic Cat, and Pipistrel. Additionally, they have six key segments: 🛩Bell, Textron Aviation, Textron eAviation, Industrial, Textron Systems and Finance

Once we determined that Textron was our top pick, we went into deeper analysis. By using Porter's Five Forces framework we were able to extract valuable insights from the industry that helped us build a solid investment thesis:

• Rivalry Among Competitors (HIGH): There exists intense competition in what is a mature market with low growth rates. The competition is mainly in the form of bidding for government contracts although product lines are slightly differentiated. Key competitors include L3Harris, Northrop Grumman, Raytheon, and Lockheed Martin.

• Threat of New Entrants (LOW): High barriers to entry due to economies of scale, competitive pricing, established distribution channels, and reliance on government contracts given to businesses with security clearance. The aerospace industry is highly complex and capital-intensive, giving it an extremely high barrier to entry. Additionally, there are high regulation standards in the aerospace industry.

• Threat of Substitutes (MODERATE): Many competitors in the U.S. are significantly larger in scale and invest heavily in R&D to stay at the leading edge of innovation. However, government contracts are locked for the long term.

• Bargaining Power of Buyers (HIGH): Low number of customers (private buyers and mainly the U.S. government) makes bargaining power high.

• Bargaining Power of Suppliers (MODERATE): Due the complex nature of the products, there exists significant supply chain risks, especially when purchasing products overseas. Furthermore, businesses must ensure compliance with federal regulations on sourcing.

Now focusing on Textron specifically, we used a SWOT Analysis to better understand the pros and cons of TXT in an effort to create an investment thesis:

• Strengths: Diversified portfolio of products and services across multiple industries. Owners of well-known and reputable brands such as Bell and Cessna. Track record of pioneering technologies and industry-firsts across its product lines.

• Weaknesses: Reliance on government contracts. Additionally, significant backlogs may put the firm's reputation at risk if delivery expectations are not met.

• Opportunities: In an effort to comply with federal regulations, Textron is attempting to reduce inputs from China and Russia. Alternatives for raw materials exist in Asia-Pacific and Latin America, leading to potential expansion into new markets. Like most competitors, Textron invests heavily in research and development.

• Threats: Global economic uncertainties and political tensions that may disrupt the supply chain. Regulations may change at any given moment. Intense competition from both domestic and international competitors across its various business segments.

In this graph we can see how TXT stock compares to the top 500 public companies in the industry. Although TXT underperformed relative to the Industrial sector, they financially outperformed the Aerospace & Defense sector. Let's keep in mind that A&D comprises 62.3% of Textron's revenue.

Investment Thesis

Recent acquisitions from state-of-the-art robotics company Howe & Howe (2018) and eAviation (electric aircraft) manufacturer Pipistrel will create synergies that will propel company value. Additionally, US government spending in the A&D space will surely continue to increase, as it has done even in periods of international peace. Lastly, TXT is in great financial standing with low long-term debt and P/E ratio compared to competition.

Finally, a snapshot of the financial model summary.

Using 3 methods, namely Discounted Cash Flow, Market Multiples: Price to Earnings, and Market Multiples: Enterprise Value (EV) to Sales we calculated a weighed average target price. We calculated weights based on two factors:

1. Historical Accuracy of Weights. We "modeled" the outcome for the previous year FY 2023, adjusting valuation weights to fit to the outcome price. From this we learned that Market Multiples hold more weight for an accurate prediction.

2. Market Comparison. We believe a company's valuation is more accurately depicted by comparing it to similar competitors with similar products. Therefore, having Market Multiples as heavier categories makes more sense.