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Impact of development contracts on Bell
Contracts related to Textron’s (NYSE:TXT) Bell for helicopters will have a significant impact on whoever wins them. Both projects involve building a demonstration aircraft. After the selection, the winner will enter the design and development phase to produce a prototype for initial manufacturing. The initial prototypes will enter an extensive test phase followed by low-level production. Only with full-scale production later this decade does the revenue become substantial and reasonable profits occur. This will not happen until the contractor comes down the experience curve and can manufacture the product efficiently. Textron will continue to have the same earnings per share outlook because winning the contract remains a slow process. But the winners’ profits long-term are high.
Management understands that it may lose one or both contracts. If they lose, they still have the civilian helicopter business. The new Bell 525 model is expected to be certified this year. The main competitor Sikorski will no longer be building this product. There are other smaller government contracts available from the Navy and Marines. But these are not as far along as the two mentioned above and there are competitors.
Management plans to expand into the electric aircraft market. They point out that Textron has the existing capability to build light aircraft and helicopters so the technology they need to obtain is more battery and motor specific. Their new acquisition, which will form the new eAviation segment, can be a source of new business. With all the R&D eAviation is expected to have $30 to $40 million dollars of revenue and a loss of about $45 million in 2022.
I have considered Textron a strong buy because it exceeds the S&P 500’s growth. It does that because its cash flow is large, so it supports a large R&D and the new products create higher sales. If they lose these contracts, I still believe that they will grow faster than the S&P 500. Still, the loss of these contracts would be serious for Bell which now provides $3 billion per year to Textron.
Bell
The future armed reconnaissance aircraft (FARA) is the closest to a decision. Textron has submitted its final bid documents for this project. They expect the decision to be made midsummer, but on May 6 2022 the Army moved FARA decision out a year. The engine for both competitors will not be available until November. The FARA competitors will fly in 2023 and a test program will take time.
Bell’s competition is the Sikorsky division of Lockheed Martin. The Bell helicopter is derived from its 525 civilian helicopter that has been delayed over its eight-year development. The FARA does not look at all like the civilian version. The army has had problems with getting new helicopter programs approved for this program. Both competitors needed aircraft flying to make it into the competition. The Army reduced the speed requirement so that Bell could compete. They are wanted as a simpler lower cost competitor. Both competitors use the same rotor diameter, a cannon, and similar electronics and missiles.
The (FLRAA) future long-range assault helicopter is the larger contract by far. It is a replacement for the Sikorsky Blackhawk, which was a replacement for the Bell Huey, the Vietnam-era helicopter. Currently, the Army has 1700 Blackhawks in service. It is designed to bring troops into a landing zone or sling cannons underneath. The competition is the Sikorski/Boeing helicopter which has twin counter-rotating rotor blades. This is like the Sikorsky (RARA) design.
Bell design is a fixed-wing craft with rotors that rotate 90 degrees to take off vertically. This craft is much faster and has a longer range. However, the competitor can unload troops in a landing zone faster and has an easier time bringing cargo to a landing zone. The Navy or Marines would prefer the Bell design, but it has a disadvantage to the Army. Both programs are part of the future vertical lift series of aircraft.
It is almost impossible to predict the success of other military contracts. Specifications demanded by the army cannot be met by either competitor. As the Colonel in charge RARA points out, the only way to meet is to repeal the laws of physics. So, he must decide which specs to cut back. The current helicopters that will be replaced by new models are more than 40 years old and the new designs, while not meeting specs, are vastly superior to the existing aircraft. The FLRAA will probably move into 2023.
Bell design is a fixed-wing craft with rotors that rotate 90 degrees to take23.
Aviation
Aviation is the hot segment with revenue up 20% and the backlog up $1 billion to $ 5.1 billion. Segment profitability was up 157%. Aviation was depressed during the pandemic. It has now taken off in part because of the problems with Airliners. Aviation’s margins were 11.6% which is unusually high for this business, in part, because it had a high service and aftermarket component because existing aircraft are flown at higher-than-normal rates. Shipments were less than planned, in part, due to the high service volume. The business has small piston engine aircraft as well as larger turboprop and jet business. They introduced a new turboprop and have another turboprop design which is a single-engine aircraft with a large passenger capacity. Their new longitude jet has an order for 200 units for NetJets. Aviation has a projected demand of $5.5 billion of revenue and they are adding people to meet production schedules. With the new models, Aviation should continue to grow.
Systems
Systems is depressed because of the low level of support contracts in Afghanistan. Sales were $273 million, and profit was down 35% to $33 million. This business introduced a naval drone that does not need a hanger. The backlog is $2.1 billion mostly new air cushion landing craft.
Industrial sales of golf carts and automotive components were up 1.6% and profits of $43 million were down 8%. The business generated $838 million of sales during the first quarter.
Risks and opportunities
New helicopter contracts bring future sales and profits. I believe it’s unlikely that Textron will get both contracts. They may get none. This will not affect its guidance of $3.80 to $4 per share. They could very easily overachieve that guidance while losing both contracts. The electric aircraft business could do well for them in the long term even though it will lose money this year.
Conclusions
I believe that the business will continue to exceed the S&P 500 index earnings. The product development spending and stock buybacks are high. However, a strong possibility of losing at least one of the military contracts would likely lead to a reduction in stock price so the stock is a hold.