Key Points
Textron trades at a steep discount to aerospace competitors like GE Aerospace.
Weak growth and uncertainty in government funding are weighing on its performance.
Textron needs to either demonstrate improved aerospace growth or provide a plan for improving it.
Aerospace stocks are running hot. Benefiting from strong demand, literal highfliers like GE Aerospace (NYSE: GE) have rallied 22% over the past year. Other names, including TransDigm Group (NYSE: TDG), continue to sport valuations like those of tech stocks. However, not every aerospace stock is performing well and trading at sky-high multiples.
Take, for instance, Textron (NYSE: TXT). Although largely an aerospace company, it trades at a conglomerate discount due to its diversified portfolio of businesses. However, with Textron in the midst of splitting up, could it soon bridge the valuation gap?
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Textron, its valuation, and spinoff plans
At first glance, Textron's "conglomerate discount" to aerospace pure plays appears overdone. After all, while this stock trades for around 13 times forward earnings, TransDigm trades for around 25 times forward earnings. GE Aerospace is even more richly priced, at around 44 times forward earnings.
Back in April, management announced plans to spin off its industrial segment as a separate publicly traded company. After the spinoff, scheduled for mid-to-late 2027, the "new" Textron would consist of its Cessna and Beechcraft aircraft businesses, its Bell helicopter business, and its aerospace and defense technologies unit Textron Systems.
What a spinoff can't solve
I wouldn't jump to the conclusion that a spinoff of its noncore businesses turns Textron into the next TransDigm or GE Aerospace. It's not just the "conglomerate discount" weighing on Textron's valuation. When Textron last released quarterly earnings in July, the company reported just modest levels of earnings and sales growth, reiterated rather than raised guidance, and disclosed how its full-year guidance hinges on securing additional funding for the MV-75 Cheyenne Program.
Considering this, Textron needs more than just a spinoff of its industrial segment. Although spinning off low-margin businesses like its E-Z-GO golf cart brand will unleash an aerospace pure play, either Textron's core business will need to demonstrate improved results, or management must provide a concrete plan to reignite growth.
Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends GE Aerospace and TransDigm Group. The Motley Fool recommends Textron. The Motley Fool has a disclosure policy.