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Will Textron (TXT) Disappoint Investors in Q2 Earnings?

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Textron Inc. (TXT - Free Report) is set to report second-quarter 2017 financial results on Jul 19, before the market opens.

In the prior quarter, the company’s earnings came in line with the Zacks Consensus Estimate. Textron has missed expectations in one of the trailing four quarters, with an average negative surprise of 0.82%.

Let’s see how things are shaping up at the company prior to this announcement.

Factors to Consider

Textron is a multi-industry conglomerate that is well-known for its brands such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee. Apart from manufacturing aircraft, automotive engine components and industrial tools as well as offering associated services, the company operates as a commercial finance corporation in select markets.

With respect to second-quarter highlights, Textron won a couple of sumptuous contracts from Pentagon, which we believe will get duly reflected in the company’s increased revenue growth for the yet-to-be reported quarter. While one of these contracts, worth $475 million was awarded by the U.S. Special Operations Command (USSOCOM) for the Mid-Endurance Unmanned Aircraft Systems (MEUAS), the other one was a Navy deal worth $146.6 million for repairing parts of the UH-1Y and AH-IZ aircraft.

Coming to expectations regarding the quarter’s outcome, the company is likely to witness strong sales growth at its Industrial business segment, courtesy of the Arctic Cat buyout in the first quarter of 2017. This segment’s growth will be further boosted with Textron having started delivering its highly efficient ELiTE series lithium golf cars in the first quarter, which comes with zero battery maintenance.

Although the company’s Bell segment has been dragging down its top line for quite a few quarters so far, management expects to see some upward potential, at least in terms of this segment’s margins, starting from the second quarter.  

On the flip side, lower-than-expected Tactical Armored Patrol Vehicle (TAPV) production in the first quarter hampered the company’s growth. Textron has incurred a notable loss of $24 million under a contract related to TAPV. In the near future, no significant improvement in this situation can be expected. We believe this program will remain a challenge for the second-quarter results as well. 

Also, the pre-tax special charges of $22 million incurred in the first quarter owing to the Arctic Cat acquisition, has forced the company to increase the annual pre-tax charges forecast by almost $15 million. These charges may also impose greater expenses on the company’s upcoming results.

For the second quarter, the Zacks Consensus Estimate for earnings is pegged at 55 cents, down 16.86% year over year, while the consensus for revenues is estimated at $3.59 billion, implying a 2.29% year-over-year increase.

Earnings Whispers

Our proven model does not conclusively show that Textron is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: Textron has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 55 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Textron carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP. But the company’s 0.00% ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Textron Inc. Price and EPS Surprise

Textron Inc. Price and EPS Surprise | Textron Inc. Quote

Stocks that Warrant a Look

Here are some defense companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Huntington Ingalls Industries, Inc. (HII - Free Report) is expected to report second-quarter 2017 results on Aug 3. The company has an Earnings ESP of +4.96% and a Zacks Rank #2.

Raytheon Company (RTN - Free Report) is expected to report second-quarter 2017 results on Jul 27. The company has an Earnings ESP of +0.57% and a Zacks Rank #3.You can see the complete list of today’s Zacks #1 Rank stocks here.

General Dynamics Corp. (GD - Free Report) is expected to report second-quarter 2017 results on Jul 26. The company has an Earnings ESP of +1.24% and a Zacks Rank #3.

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