Foolish Forecast: Can Textron Top Itself?

Last April, Textron (NYSE: TXT  ) marked its lucky seventh straight quarter of beating Wall Street consensus earnings targets with a stick. Which raises the question: Is eight a lucky number, too? I think I read recently that Chinese investors think so. We'll soon see how that applies to Textron.

What analysts say:

• Buy, sell, or waffle? A dozen analysts follow Textron, with 10 rating it a buy, and two a hold.
• Revenue. On average, analysts expect to see 8.5% sales growth, to $3.06 billion.
• Earnings. Profits are predicted to rise in tandem to $1.45 per share.

What management says:
Boasting of "strong organic revenue growth and improved profitability," CEO Lewis Campbell characterized his company's performance last quarter as "outperforming" -- presumably surpassing the expectations of analysts and management alike. In response, Campbell lifted guidance for the rest of this fiscal year, in anticipation of "continued ... solid top-line growth and strong operational performance." Management's prediction of $6.10 to $6.30 per share in full-year profits was a $0.20 hike from previous expectations.

What management does:
The modest sales growth that Wall Street expects to see won't be enough to earn Textron its predicted profits, however. To do that, it will need to extract more profit from its revenue as well. Fortunately, this doesn't seem to be a problem for the firm, which consistently grosses more than 25% of its revenue, and has been growing its operating and net margins incessantly over the last 18 months. For comparison, its operating margin is vastly superior to the single digits achieved by rivals such as TRW (NYSE: TRW  ) and Embraer (NYSE: ERJ  ) , and on par with the low-to-mid-teen margins that General Dynamics (NYSE: GD  ) , General Electric (NYSE: GE  ) , and United Technologies (NYSE: UTX  ) pull down.

Margins	12/05	4/06	7/06	9/06	12/06	3/07
Gross	25.4%	25.2%	25.8%	25.9%	25.6%	25.8%
Operating	11.7%	11.8%	12.6%	12.9%	12.6%	13.1%
Net	2%	2.4%	1.8%	4.8%	5.2%	5.3%

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:
In contrast to management's expectation of greater-than-expected GAAP profits this year, Campbell left his free cash flow estimate intact at somewhere between $500 million and $550 million. Investors might at first be inclined to look askance at that prediction, based on Textron's "manufacturing free cash flow" generation last quarter -- a mere $23 million -- and its total free cash flow of negative $131 million. But that would be a mistake.

Reviewing the past several years' financials, I note that this firm's fiscal first quarters are almost always its weakest. And with the exception of the years 2004 and 2006 (and even then, just barely), the firm hasn't managed to generate positive free cash flow in any fiscal first quarter this millennium. The good news is that it always manages to end the year awash in cash profits -- on average, $610 million per year over the last five years. If business is as good as Campbell is telling us, I suspect it will have little problem hitting its guidance range this year -- if it doesn't "outperform" yet again.

What did we expect to see at Textron last quarter, and what did we get? Find out in:

• Textron's Lucky Number
• Foolish Forecast: Textron's Lucky Number

Fool contributor Rich Smith does not own shares of any company named above. Embraer is a Stock Advisor pick. The Fool's disclosure policy isn't sure about seven, but it knows that three is a magic number.