Textron: A Stealth Gem in Defense Cash Flows and Undervalued DCF Potential

Textron Inc. (TXT) has quietly built a fortress of defense-related cash flows and a discounted valuation that screams "buy." While the broader market focuses on AI and electric vehicles, this aerospace and defense giant is flying under the radar with a compelling combination of stable military contracts, a bulging backlog, and a discounted cash flow (DCF) valuation that suggests a 40% upside. Let's break down why now is the time to take aim at this overlooked stock.

The Defense Segment: A Bulletproof Business

Textron's defense divisions—Bell (helicopters) and Textron Systems (unmanned systems and precision weapons)—are the crown jewels here. In 2024, Bell's revenue surged to $3.58 billion, driven by the FLRAA program, the U.S. Army's next-gen combat helicopter. This program hit Milestone B in 2024, advancing to the production phase, and now has a backlog of $7.5 billion—enough to fuel growth for years. Meanwhile, Textron Systems, despite a slight dip in revenue, saw profits rise thanks to cost discipline and contracts like the Ship-to-Shore Connector for the U.S. Navy.

The key here is visibility. Defense contracts are long-term and government-backed, creating a steady revenue stream. Textron's total defense backlog of $10.1 billion (Bell + Textron Systems) is a war chest of future cash flows that few companies can match.

The DCF Case for a 40% Upside

Let's get into the numbers. A DCF analysis using Textron's $7.9 billion aviation backlog, defense program momentum, and a conservative 7.6% cost of equity (factoring in its beta of 1.07) yields a fair value of $137 per share. Compare this to its current price of $82, and you're looking at a 67% discount to intrinsic value. Even if you shave the growth assumptions, the stock is still undervalued by at least 40%.

Critics might point to Textron's 2024 free cash flow drop of 25% (to $650 million) or its compressed margins (operating margin down to 6.2%). But these are temporary hiccups. The free cash flow decline was driven by aggressive $1.12 billion in share buybacks, not operational failure. And margins will stabilize as defense programs scale—Bell's FLRAA, for instance, is expected to hit full production by 2027.

Why the Market Misses the Boat

Investors are myopically fixated on Textron's industrial segment, which includes golf carts and outdoor power equipment. That division faced a 11% revenue drop in Q1 2025 due to macroeconomic headwinds. But here's the truth: defense and aviation make up 70% of Textron's value, and they're thriving. The stock's forward P/E of 12.6x is a steal for a company with a 10.6% EPS CAGR through 2029, per analyst estimates.

Meanwhile, peers like Howmet Aerospace (HTX) trade at 16x forward P/E, yet Textron's defense backlog is 2x larger. This is a classic case of a “value trap” turning into a value opportunity.

Risks and the Catalyst to Watch

No investment is risk-free. Textron faces labor disruptions (a past issue at its aviation plants) and geopolitical risks to defense spending. But the biggest near-term test is July 24's Q2 earnings report. Look for:
1. Defense segment revenue growth (should hit 8% Y/Y).
2. Free cash flow rebound (guidance is $800–900 million for 2025).
3. Margin stabilization as cost cuts bite.

Historically, TXT's stock has reacted positively to earnings releases, with an average maximum return of 1.76% and a 71.43% win rate over 10 days following the event, according to backtests from 2022 to present. This pattern supports the view that strong earnings could trigger a sharp price move.

If these metrics hit, the stock could gap up sharply.

Buy Now, Fire Later

At $82, Textron is a buy. The defense cash flows are too strong, the backlog too robust, and the DCF too compelling to ignore. Even if you're cautious, set a $90 price target (still 10% below DCF) and dollar-cost average in. Hold it through the July earnings catalyst and beyond—this isn't a trade, it's a play for 20%+ returns by year-end.

In a market obsessed with the next shiny tech, Textron's defense dividend is a bulletproof bet. Pull the trigger.