Diversified U.S. conglomerate, Textron Inc. (TXT - Analyst Report) ended the second quarter 2012 on a positive note on the back of strong performance at Bell, continued improvement at Cessna, complemented by good performance in the Industrial business. Following the release of second quarter 2012 results on July 19, 2012, most of the analysts covering Textron have raised their earnings estimates for full year 2012. The revision in estimates mainly reflects the solid beat and steady guidance provided by the company.
Highlights from the Quarter
Textron’s second-quarter 2012 adjusted earnings per share of 58 cents doubled year- over-year and outstripped the Zacks Consensus Estimate of 44 cents.
Textron clocked quarterly revenue of $3.02 billion clearing both the Zacks Consensus Estimate of $2.97 billion and the year-ago quarterly revenue of $2.73 billion. The year-over-year spike in revenue of 10.7% is attributable to higher performance from all of its manufacturing business segments, barring Textron Systems. The performance of the Finance division was also higher than the year-ago quarter.
We have discussed the quarterly results at length here: Textron Flew Past Estimates
Agreement – Estimate Revisions
Estimates for Textron saw a steady northward movement over both the past week and month for both the third quarter and full year 2012. Over the past month, all estimate revisions were towards the positive side with 11 (out of 12 analysts) having raised their forecasts for full year 2012 versus not a single downward revision.
Similarly, for the third quarter, estimates manifest a clear positive bias with 7 (out of 11 analysts) upward movements versus a lone negative revision over the past month. The bullish sentiment is riding on the expectation of continued performance improvements at Bell and Cessna along with reduction of losses at Textron Financial.
Magnitude – Consensus Estimate Trend
Estimate for full year 2012 have witnessed a steep climb northward over the past month from $1.94 to $2.08. Also, given the upward pressure from the positive revisions, estimate for the third quarter has improved by 3 cents to 52 cents over the past month.
Neutral on Textron
Based in Providence, Rhode Island, Textron Inc. is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools.
We believe Textron should do well in its commercial aerospace businesses with the gradual recovery in the economy. The improving fundamentals in the commercial aerospace industry should bode well for Textron’s Cessna jets and Bell Helicopter businesses going forward. Cessna’s fortunes will improve mainly through high demand for light cabin business jets. Also, in the near term, Bell’s growth will be guided by a judicious mix of military and commercial business from the V-22 Osprey and H-1 helicopters. Textron Systems will also see growth coming from government’s focus on UAVs (unmanned aerial vehicles) and ASVs (armored security vehicles).
Also, Textron’s geographically diverse network of aircraft, defense & intelligence, industrial and finance businesses negates any specific business risk. The company is known around the world for its most recognizable and valuable brand names, such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, Lycoming, E-Z-GO and Greenlee. The company has a strong presence in diverse areas of business jets and other general aviation aircraft, helicopter, aircraft engines, golf carts, turf maintenance equipment, electronic test equipment and blow-molded fuel tanks.
Textron continues to enjoy a strong backlog at its business divisions. Textron was able to secure a few important contracts during the second quarter. The most noticeable among them were the Canadian Tactical Armored Patrol Vehicle, the U.S. Navy’s Ship-to–Shore Connector, upgrades to the U.S. Army’s Shadow TUAS, and an agreement with Berkshire Hathaway Inc. to provide up to 150 Citation Latitudes for their fleet. The company in order to capitalize on the Chinese market formed a JV with Aviation Industry Corporation of China (AVIC) to co-develop several aircraft aimed at the burgeoning Chinese market.
Textron’s balance sheet remains stable with a long-term debt-to-capitalization of 54.9% at the end of the first half of 2012 versus the Zacks Industry Average of 66.5%. The company also ended the first half of 2012 with cash holdings of $898 million, which, along with its receivables liquidation expected to come through, would be enough to keep the liquidity profile of the company in good shape. Textron’s balance sheet also improved shedding $504 million of long-term debt in the first half leaving approximately $1.8 billion of long-term debt.
We currently have a long-term Neutral recommendation on Textron. The stock carries a Zacks #2 Rank (Hold rating) in the short run, primarily due to the low-level of current valuation. The stock is now trading at a discount in terms of forward earnings estimates versus its diversified conglomerate peers like Honeywell International Inc. (HON - Analyst Report) and Carlisle Companies Incorporated (CSL - Snapshot Report).
About Earnings Estimate Scorecard
As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/