Textron's Boastful CEO Is on the Money

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If you're looking at the fourth-quarter and year 2007 earnings reports Textron (NYSE: TXT) released yesterday, and wondering why the stock was down 6% on the news, then join the club. (As of this writing, however, the stock had recovered about 3.5% of those losses on an upgrade from Citigroup.)

CEO Lewis Campbell described the quarter as putting the cap on "a year of powerful performance at Textron." As boastful as that sounds, in this Fool's view, it's entirely justified.

Textron beat analyst estimates with a stick this past quarter, turning in 16% revenue growth when most Street firms predicted 12%, and earning a full dime per share more than expected -- $1.02 -- up a whopping 32% over the year-ago period.

The year that was
And that's just the quarter's results. The annual numbers were fully as "powerful" as Campbell suggested. Management grew its revenues for the year 15%, to $13.2 billion. What's more, it increased margins earned on those revenues almost across the board:

• The industrial segment, Textron's least profitable, grew its operating margins 110 basis points to 6.3%.
• Bell Helicopter's operating margins rose 130 basis points to 8.6% -- precisely equal to the margins that its rival, United Technologies' (NYSE: UTX) Sikorsky, pulls down.
• Cessna soared 180 basis points to 17.3% -- superior to the 16.8% margin that General Dynamics (NYSE: GD) earns in its aerospace division.
• Only finance suffered a decline -- not exactly a shocker in this credit environment -- and it only fell 90 basis points.

With nearly every dollar Textron sucked in dropping more pennies to the bottom line, profitability shot through the roof last year, with per-share profits rising 56% in comparison to fiscal 2006 (albeit the earlier year's profits were depressed by a one-time impairment charge.)

The years that will be
Turning to the subject close to my heart this earnings season -- backlog -- things are looking just about as great today as they were earlier this week. With annual revenues up 15%, the company reported that backlog at the company's two largest segments, Bell and Cessna, leapt 23% and 48%, respectively.

To me, that suggests we'll see sales continue to rise at Textron in 2008. Campbell basically confirmed this by saying, "We expect another banner year of business jet orders exceeding current year deliveries. Given that our jet backlog already extends well into 2009, this bodes well for continued, uninterrupted growth well into the next decade at Textron."

Foolish takeaway
Listen, I understand that Textron's guidance spooked investors yesterday. The company's making investments in its future that threaten its ability to hit analyst earnings estimates next year, and that will likely depress 2008 cash profits below its 2007 level.

But the facts remain: Textron did a great job in 2007, and even at the high price of 16 times trailing free cash flow (18 times forward FCF), Textron's not trading at much of a premium to the 14% long-term growth most analysts foresee. Throw in the fact that these same analysts underestimated Textron 10 quarters in a row, and I suspect long-term investors can do just fine owning Textron.

Check out previous previews for Textron at:

• Foolish Forecast: A Trend at Textron?
• Foolish Forecast: Can Textron Top Itself?
• Foolish Forecast: Textron's Lucky Number