Textron Earnings Underwhelm

Textron (NYSE: TXT  ) earnings came out Wednesday, and as you can probably tell from the "green" ticker, investors received them warmly. Despite revenues being down, and earnings along with them, Textron earnings still came in at $0.40 per share, and that was enough to beat estimates by a couple of pennies.

But was it enough to justify investors bidding up the shares today? That's what we're here to find out. In Q2 2013, Textron reported:

  • Sales from manufacturing operations of $2.8 billion, down 5.3% year over year
  • Slightly worse revenues once finance operations were factored in, down an even 6%
  • Net income from continuing operations of $0.40 per share, down 31%

Among the company's several business segments, the Textron systems and industrial divisions performed best, growing revenues 8.5% and 6%, respectively. Cessna and the Bell helicopter division saw lower revenues -- leading Cessna in particular to report a $50 million loss for the quarter, a reversal from last year's $35 million profit.

Perhaps the worst news of the day, though, is the reversal in cash production. Textron consumed $274 million in negative cash flow during the fiscal second quarter. After subtracting a further $113 million spent on capital investments, the company was left with total negative free cash flow of $387 million -- again, a reversal from the year-ago positive free cash flow numbers, and focusing on manufacturing operations alone (i.e. not counting cash-burn from the finance division, free cash flow was "only" negative $362 million).

Promises, promises
In short, there's a lot to hate in the Textron earnings report. When you tally up losses to date, Textron has burned through some $787 million in total negative free cash flow so far this year. So why are investors still buying Textron shares rather than selling?

In part, it's probably the company's comments that order trends at Bell remain "strong", while growth is said to be "solid" at Textron systems and industrial division. But if you ask me, the real reason investors are sticking by Textron can be summed up in one word: promises.

Its performance so far notwithstanding, Textron continues to promise investors that it will reverse its cash-burning ways in the second half of this year, and end 2013 with positive manufacturing free cash flow (before deducting cash injections to the pension fund) of $400 million -- in essence, management is saying that it will do about $1.187 billion better in the second half of the year than it's done in the first half.

Personally, I'd prefer to see performance. With Textron shares costing upwards of 14 times earnings today, and with Textron earnings growth estimated at 10% over the next five years, the stock simply costs too much to take management's promises at face value.

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