Textron Inc. (TXT)

Total return at 5 years: 22.0%/year = 21.9% appreciation + 0.1% dividend. The target price ($204) is ex-dividend; the $0 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $120 · Multiples $164) exceeds the market price ($76).

Today — with margin of safety: at $76 trades ~53.8% below its value discounted to today (~$164) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($204) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($76) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-2.1%/year) than we project (7.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$0.7 bn of owner earnings in year 5 (vs ~$1.1 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT (resultado operativo). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM ended 4-Jul-2026 (10-Q). Textron combines long-cycle aerospace/defense manufacturing (Aviation, Bell, Systems) with a lower-margin industrial business (Kautex, specialized vehicles) and a captive finance arm (Textron Financial Corporation) that finances the purchase of its own aircraft and helicopters. That is why the model consolidates a single revenue and operating margin path, but the exit multiple is built as a blend weighted across three pieces: Aerospace and Defense (~90% of terminal operating income, aerospace band 15-22×), Industrial (~7%, the `industrial` band 12-18×, currently in a sale process announced on 28-Jul-2026) and Finance (~3%, treated as a lender, the `bank` band 10-15×). The year-1 starting point (+7.5%) follows the recent trajectory (+6.3%/+0.1%/+8%/+8.8% year over year) and the first-half 2026 revenue pace (+7%) cited in the release of 28-Jul; there is no explicit revenue guidance, only earnings per share ($5.39-5.59 GAAP / $6.40-6.60 adjusted) and manufacturing cash flow ($700-800M), which imply more moderate margin expansion than revenue because of MV-75 program costs. The tax rate (18.8%) is the TTM effective rate (XBRL). Buybacks are the dominant vector of capital return (diluted shares fell from 215M in FY22 to 175M in the TTM) and are modeled with `sharesPath`, with no cash accumulation (TTM free cash flow of US$0.759bn is similar to total returns of US$0.788bn in buybacks and dividends, that is there is no real surplus to accumulate).

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $204 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $76, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $204 in 5 years plus $0 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $164. Against the current market price ($76), the margin of safety is 53.8% (trades below the maximum → there is margin) and the total return at that price would be 22.0% annually.

• Entry multiple. EV/EBIT 10× against a 15-22× band for the aerospace archetype
• Estimated 5-year return. The base case implies a CAGR of +22%, with verdict Very undervalued
• Margin of safety. The stock trades There is a margin of safety: the market's perception is meaningfully worse than reality. versus the maximum price derived from the 15% hurdle

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ! CFROIC backs up the ROIC (63%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. TTM free cash flow ($0.759bn) is depressed by inventory buildup from the Ascend and MV-75 ramp
• Return on capital. Operating income over the balance sheet's real invested capital sits in the good zone of the 10% bar
• Reinvestment runway. Growth capex is modest (17% of total capex); most of the cash flow is returned via buybacks

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The consolidated backlog is the highest-signal leading driver: contracted and not yet recognized, it anchors the coming years' revenue path better than trend extrapolation. Aircraft and helicopter deliveries are the volume driver for the commercial business; per-unit price (mix and price inflation) shows up in revenue growth above unit-delivery growth. Bell's MV-75 program has no comparable public volume driver yet, since its revenue is still mostly development-stage (Engineering and Manufacturing Development) rather than serial deliveries.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (04-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Revenue growth. Recent year-over-year of +6.3%/+0.1%/+8%/+8.8%, driven by Bell (MV-75) and Aviation
• Backlog. $18.8 billion at year-end 2025, stable in the second quarter of 2026
• Single-program dependence. MV-75 is Bell's growth engine; its funding is not guaranteed for all of 2026

• Business recurrence. The defense backlog and aftermarket business give multi-year visibility; business aviation is more cyclical
• Product differentiation. Certified aircraft and helicopters with recognized brands (Cessna, Beechcraft, Bell); Kautex is more commodity-like
• Customer concentration. 27% of revenue comes from the U.S. government, with termination-for-convenience risk
• Behavior in recessions. Business aviation contracted materially in the 2008-2009 crisis; defense is more resilient

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 1.0x
• ✓Interest coverage (EBIT / interest)12.7x
• –Liquidity (current ratio)no data
• !Cash quality (CFROIC vs ROIC)CFROIC backs 63% of ROIC
• ✓Value creation (ROIC − 10% bar)+9pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.2x
• !Float / working capitalConsumes cash $0.5 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.6% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Debt of $3.466bn against equity of $8.054bn; moderate for a capital-equipment manufacturer
• Liquidity. Cash of $1.606bn, down from $1.940bn at the start of the year due to sustained buybacks
• Pension commitments. The pension plan generates meaningful non-operating income ($266M in FY2025) that is excluded from operating income

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO transition. Lisa Atherton took over in January 2026 after nearly 20 years of internal career progression at the company, including CEO of Bell and of Systems
• Capital allocation. 89% of capital deployed goes to buybacks, with diluted shares falling from 215 to 175 million over four years
• Skin in the game. Directors and executives own just 1.9% of the capital; there is no controlling shareholder

• Multi-industry conglomerate structure (aviation, defense, industrial, financing) that makes direct valuation difficult and likely generates a holding discount on the quality aerospace core
• The Industrial segment sale process was only announced on 28-Jul-2026, with no terms or timeline defined, introducing short-term uncertainty with no clear closing catalyst
• MV-75 program funding risk (guidance conditioned on additional 2026 funds) creates a cloud over near-term adjusted earnings, even as the program itself keeps advancing

There is no identifiable motivated-seller event (no recent accounting restructuring or impairment); the discrepancy looks more like missing buyers — the complexity of valuing five segments of different natures under one stock, added to the recent uncertainty over Industrial and MV-75 funding, likely deters analysts who prefer simpler pure-aerospace stories.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +8%/year (+44% total): the margin of safety protects the downside. The bull (+31%/year, +289% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• MV-75 funding. Disclosed risk of a $0.20-0.30 per share cut in adjusted earnings without additional 2026 funds
• Industrial sale. Process just started, with no terms or timeline defined
• Business aviation cycle. Sensitive to interest rates and macroeconomic conditions
• Fixed-price contracts. Textron absorbs cost overruns above the agreed price with the government

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 19% above the 10% bar, with a +54% margin → a quality business at a good price.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 7% at a PEG of 1.5 → reasonable for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 10% (EBIT/EV) + ROIC 19% → makes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -2% vs our 7%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +8%/yr, bull-scenario ceiling +31%/yr over 5y and a +54% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: switching costs, intangibles, efficient scale, cost advantage → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -2%, within what we project (7%) — the story squares with the numbers.