Foolish Forecast: Trend's the Friend at Textron

For nearly two-and-a-half years in a row -- nine quarters in all -- industrial conglomerate Textron (NYSE: TXT  ) has stumped the Street with a clean sweep of "earnings beats." Tomorrow, the company will go for a "perfect 10" and another beat. Will it succeed?

What analysts say:

  • Buy, sell, or waffle? Eleven analysts keep tabs on Textron. Nine of them rate it a buy, and two say "hold."
  • Revenues. On average, they're looking for 12% quarterly sales growth to $3.6 billion.
  • Earnings. Profits are predicted to rise 19% to $0.92 per share.

What management says:
It's official. In November, Textron announced the closing of its purchase of United Industrial Corporation, maker of the Shadow unmanned aerial vehicle (UAV). As I've argued in previous columns, I believe that UAVs are one of several "waves of the future" in defense spending -- a wave that rivals Northrop Grumman (NYSE: NOC  ) and Lockheed Martin (NYSE: LMT  ) , Boeing (NYSE: BA  ) and L-3 (NYSE: LLL  ) , and even Honeywell (NYSE: HON  ) are already surfing. Kudos to Textron for recognizing this, and buying its way into this market at an entirely reasonable 1.6-times-sales purchase price paid for United Industrial Corp. (UIC).

Speaking of United Industrial, Textron actually said little about its new purchase in last quarter's earnings release. On the contrary, in predicting it would achieve $13 billion in sales, earn between $3.40 and $3.50, and generate between $600 million and $650 million in free cash flow this year, Textron CEO Lewis Campbell expressly excluded the effect of the UIC acquisition from these estimates. Guess we'll have to wait until Thursday to learn what effect the purchase had.

What management does:
As I mentioned back in November, I expect that the purchase -- over the long term, at least -- will boost margins at Textron. But the company's already done pretty well in that regard, even before it added UIC to the mix. After sliding for a while, the rolling gross margin perked up last quarter, joining operating and net margins in an upward trend.

Margins

7/06

9/06

12/06

3/07

6/07

9/07

Gross

25.8%

25.9%

25.6%

25.8%

25.8%

26.0%

Operating

12.0%

12.4%

12.3%

12.8%

12.8%

13.3%

Net

1.8%

4.8%

5.2%

5.3%

6.3%

6.8%

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:
This earnings season, I'm running down the "backlog" numbers at all of the major defense contractors, in hopes of finding clues to their futures. Textron is a bit of a different beast from firms like Boeing or Lockheed, though. Only two of its four businesses -- Bell and Cessna -- really follow the long-lead-time "backlog business model," and Textron reports those two separately. So let's do the same here, reviewing the backlog and revenue trends at each of these two business segments:

Bell

Q3 2005

Q3 2006

Q3 2007

Total backlog

$2.9 billion

$3.3 billion

$3.6 billion

YTD revenues

$2.1 billion

$2.4 billion

$2.8 billion

Cessna

Q3 2005

Q3 2006

Q3 2007

Total backlog

$6.0 billion

$7.2 billion

$11.9 billion

YTD revenues

$2.5 billion

$2.9 billion

$3.4 billion

Do you see what I see? Sales have grown a whopping 33% over the past two years at Bell, and Cessna has done even better -- up 36%. But the backlog picture is blurrier. Backlog grew "only" 24% at Bell, while it nearly doubled at Cessna.

While some might think the slower growth in backlog at Bell is cause for worry, I disagree. Cessna is by far the more profitable business for Textron, generating pre-tax operating profit margins more than twice as robust as (pre-UIC) Bell's. So when I see the more profitable business expanding four times as fast as the less profitable one, I suspect this portends good things for Textron shareholders.

Check out previous previews for Textron at:


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