We believe Howmet Aerospace stock (NYSE: HWM), an aerospace company that manufactures components for jet engines, is a better pick than its sector peer, Textron stock (NYSE: TXT
Interestingly, Textron has had a Sharpe Ratio of 0.3 since early 2017, while the figure stood at 0.4 for Howmet, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Looking at stock returns, TXT has underperformed with 7% returns this year, compared to 19% gains for HWM and a 16% rise in the S&P500 index. There is more to the comparison, and in the sections below, we discuss why we believe that Howmet will offer better returns than Textron in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Textron vs. Howmet: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Textron’s Revenue Growth Is Better
- Both companies have seen revenue decline in recent years. While Textron’s revenue declined at a 1.4% average annual rate in the last three years, Howmet’s sales fell at an average rate of 5.8%.
- The revenue decline for Textron can primarily be attributed to the impact of the Covid-19 pandemic on the company’s businesses, especially aviation and industrial. A reduction in aircraft utilization impacted its aviation aftermarket business, as well. Weak travel demand and supply chain issues led to order cancellations in 2020.
- While aviation demand has picked up over the last year or so, Textron’s Bell helicopter revenue has decreased due to lower military demand.
- Howmet Aerospace
was formerly known as Arconic
. In April 2020, Arconic completed separating its businesses into two independent, publicly traded companies – Howmet Aerospace and Arconic Corporation. Following the separation, Arconic Corporation held the global rolled products, aluminum extrusions, and building and construction systems businesses, while Howmet Aerospace held the engine products, fastening systems, engineered structures, and forged wheels.
- The revenue decline for Howmet over the recent years can be attributed to lower sales volumes in the commercial aerospace market amid the impact of Covid-19. Furthermore, the Boeing 737 MAX and Boeing 787 production declines also weighed on the company’s revenue growth.
- That said, the sales growth has rebounded in 2022 and the first half of 2023 with increased demand for commercial airplanes. Howmet’s last twelve-month sales stood at $6.2 billion compared to $5.0 billion in 2021.
- Our Textron Revenue Comparison and Howmet Aerospace Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, Howmet’s revenue is expected to grow faster than Textron’s over the next three years.
2. Howmet Is More Profitable
- Textron’s operating margin rose slightly from 6.9% in 2019 to 7.9% in 2022, while Howmet’s operating margin increased from 7.7% to 14.7% over this period.
- Looking at the last twelve-month period, Howmet’s operating margin of 15.4% fares better than 8.4% for Textron.
- Our Textron Operating Income Comparison and Howmet Aerospace Operating Income Comparison dashboards have more details.
- Looking at financial risk, Textron fares better. While Textron’s 21% debt as a percentage of equity is marginally higher than 20% for Howmet, the latter’s 5% cash as a percentage of assets is lower than 11% for TXT. This means that both companies have similar debt positions, but Textron has more cash cushion.
3. The Net of It All
- We see that Howmet is more profitable while Textron has a better financial position.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Howmet is the better choice of the two.
- Both stocks are trading slightly above their historical averages with increased sales growth. Textron is currently trading at 1.1x trailing revenues, vs. the last five-year average of 0.9x. In contrast, Howmet stock trades at 3.2x revenues vs. the last five-year average of 2.1x.
- Although we expect this gap in valuation multiple to narrow in favor of Textron in the coming years, Howmet will likely outperform Textron due to its superior (expected) revenue growth.
- Our Textron Valuation Ratios Comparison and Howmet Aerospace Valuation Ratios Comparison have more details.
- The table below summarizes our revenue and return expectations for Textron and Howmet over the next three years and points to an expected return of -6% for TXT over this period vs. a 10% expected return for HWM, based on Trefis Machine Learning analysis – Textron vs. Howmet – which also provides more details on how we arrive at these numbers.
While HWM stock may outperform TXT, it is helpful to see how Textron’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Textron vs. Whirlpool
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