In a promising outlook for Howmet Aerospace (NYSE: HWM (BMV:HWM)), the jet engine components producer is predicted to outshine its industry counterpart, Textron (NYSE: NYSE:TXT XT). Despite a higher valuation multiple of 3.2x revenues compared to Textron's 1.1x, Howmet's financial performance has been more robust, driven by superior profitability and future prospects.
This year has seen Howmet's stock returns significantly outpace those of Textron and even the S&P 500 Index. While Textron recorded a modest 7% increase, Howmet experienced a 19% gain, surpassing the S&P 500 Index's rise of 16%.
In terms of risk-adjusted return, as measured by the Sharpe Ratio, both companies have shown consistency since 2017. However, Howmet's ratio stands slightly higher at 0.4 compared to Textron's 0.3, albeit both lagging behind the S&P 500 Index's 0.6 over the same period.
Recent years have witnessed revenue declines for both companies, primarily due to the impact of the Covid-19 pandemic on their respective businesses. For Textron, decreased aircraft use and subsequent order cancellations in 2020 led to an average annual revenue fall of 1.4% over the last three years.
On the other hand, Howmet Aerospace - formerly known as Arconic ARNC - separated into two independent public entities in April 2020: Howmet Aerospace and Arconic Corporation. The former saw its revenue decline largely due to decreased sales volumes in the commercial aerospace market amid Covid-19 impacts and production reductions for Boeing (NYSE:BA) 737 MAX and Boeing 787.
However, a rebound in sales growth was observed in 2022 and the first half of this year due to increased demand for commercial airplanes. Howmet's sales for the last twelve months totalled $6.2 billion, marking an improvement from $5.0 billion in 2021.
In terms of profitability, Howmet has outperformed Textron. Its operating margin rose from 7.7% to 14.7% between 2019 and 2022, compared to Textron's increase from 6.9% to 7.9%. Over the last twelve months, Howmet's operating margin of 15.4% surpassed Textron's 8.4%.
From a financial risk perspective, Textron appears more stable with a debt-to-equity ratio of 21%, slightly higher than Howmet's 20%. Additionally, Textron maintains a larger cash buffer, with cash making up 11% of its assets compared to Howmet's 5%.
Despite trading above their historical averages due to increased sales growth, both stocks are considered good investment options. However, Howmet is expected to outperform Textron in the coming years due to its anticipated superior revenue growth.
In conclusion, while both companies have demonstrated resilience in challenging market conditions, Howmet Aerospace appears to hold a more promising outlook due to its superior profitability and expected revenue growth over the next three years.
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