For two straight years, defense contractor Textron (NYSE:TXT) has done nothing but beat Wall Street earnings estimates black and blue. Analysts expect the firm to remain firmly in the black when it reports third-quarter earnings Thursday morning. The only question is: Will the profits be sufficiently plentiful to keep investors from getting the blues?

What analysts say:

  • Buy, sell, or waffle? Twelve analysts follow Textron, with 10 rating it a buy and two a hold.
  • Revenue. On average, analysts expect to see 11% sales growth to $3.14 billion.
  • Earnings. Profits are predicted to rise 13% to $0.77 per share.

What management says:
The big news this quarter was last week's news that Textron is moving further into the unmanned aerial vehicle space (UAV) with its purchase of United Industrial Corp. (NYSE:UIC). According to the press release, Textron will pay $81 per stub in this all-cash acquisition totaling $1.1 billion.

What management does:
With a 9.4% operating margin, UIC should do wonders for improving Textron's already respectable 7.3% operating margin in the Bell Helicopter segment to which it will be attached. That's a good thing, because the Bell division is depressing Textron's overall operating margin of 12.8%. Considering how much margins have improved despite Bell's lagging, the addition of UIC's $700 million in higher-margin revenue should give the whole firm's profits a bit of extra lift, widening the margin gap between Textron and rivals like General Dynamics (NYSE:GD) and Lockheed Martin (NYSE:LMT) -- and perhaps even catching up to United Technologies' (NYSE:UTX) 13% margin.

Margins

4/06

7/06

9/06

12/06

3/07

6/07

Gross

25.2%

25.8%

25.9%

25.6%

25.8%

25.8%

Operating

11.6%

12.0%

12.4%

12.3%

12.8%

12.8%

Net

2.4%

1.8%

4.8%

5.2%

5.3%

6.3%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
But is such an increase worth the price Textron's paying? There are really three ways of looking at this. On the one hand, UIC's operating margin is inferior to that of Textron's as a whole -- suggesting Textron is overpaying when it shells out about 1.7 times sales for UIC, even as its own shares fetch just around 1.3 times their (more profitable) sales. On the other hand, because we've seen that UIC is more profitable than the specific Textron segment into which it will be integrated, the small premium being paid looks justified.

But the real point here is that by buying UIC, Textron improves its competitive position in the UAV market vis-a-vis rivals like Boeing (NYSE:BA) and Northrop Grumman (NYSE:NOC). As I've argued in the past, the U.S. military appears to be on a long-term track away from flying manned combat aircraft and toward putting more winged robots in the sky. It seems to me 1.6 times sales is a small price to pay to secure Textron's place in this trend.

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