Diversified U.S. conglomerate, Textron Inc. (TXT - Analyst Report) recently delivered third-quarter 2012 earnings. The Wall Street analysts had more than a week to ponder over the earnings results and eventually made their estimates revision. In subsequent paragraphs, we will cover the results of the recent earnings announcement, estimate revisions by analysts as well as the Zacks Rank and long-term recommendation on the stock.
Highlights from the Quarter
Textron’s third-quarter 2012 earnings per share of 48 cents were up 6.7% from 45 cents per share in the year-ago quarter. The quarterly result however came below the Zacks Consensus Estimate of 52 cents. Higher numbers year over year for the company were due to strong performance at Bell, continued improvement at Cessna, complemented by good performance in the Industrial business and favorable liquidation activity in the finance portfolio. Including discontinued operations, earnings came in at 51 cents compared with 47 cents a share earned in the year-ago quarter.
Textron clocked quarterly revenue of $3.0 billion, up 6.6% from $2.8 billion in the year-ago period. However this came below the Zacks Consensus Estimate of $3.05 billion. The year-over-year spike in revenue is attributable to higher performance from all of its manufacturing business segments, barring Textron Systems. The performance of the Finance division was also better than the year-ago quarter.
Textron raised its 2012 earnings per share from continuing operations guidance to a band of $1.95 to $2.05 per share versus an earlier band of $1.80 to $2.00 per share. The company however reaffirmed its manufacturing free cash flow before pension contribution forecast for 2012 in the range of $700 million to $750 million. The company anticipates planned pension contributions of about $200 million.
We have discussed the quarterly results at length here: Textron Misses, Ups View
Agreement – Estimate Revisions
Estimates for Textron saw heavy movement over both sides for the fourth quarter. Over the past month, out of 12 available estimates, 5 estimates were revised downward while 4 moved north. However, over the past week, no estimates were revised.
For full-year 2012, estimates manifest a clear negative bias with 7 (out of 13) downward movements versus 2 positive revisions over the past month. The negative sentiment is owing to the skeptism about the intermediate prospects of Textron’s commercial aerospace businesses. The economic downturn, along with reduced access to the credit markets, has led to lower spending by commercial air carriers. A prolonged period of weakness in the business jet market could lead to cancellations/deferrals of orders in its backlog. Also, in the near term, the focus on used jets rather than new ones have taken a toll on Cessna’s order backlog, which fell to $1.3 billion at the end of the first nine months of 2012, down $196 million from the end of the second quarter of 2012.
Magnitude – Consensus Estimate Trend
Estimate for full year 2012 have witnessed a fall over the past month from $2.09 to $2.06. However, given the balanced revisions, estimate for the fourth quarter has remained flat at 59 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’s balance sheet remains stable with a long-term debt-to-capitalization of 55.9% at the end of the first nine months of 2012 versus the Zacks Industry Average of 65.7%. The company also ended the first nine months of 2012 with cash holdings of $1.2 billion, 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 $496 million of long-term debt in the first nine months, leaving approximately $1.8 billion of long-term debt.
Textron currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. This is in line with its peers like Tyco International Ltd. (TYC - Analyst Report) and United Technologies Corporation (UTX - Analyst 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/