Foolish Forecast: Textron Takes Sellers to the Cleaner

For 12 straight quarters -- three years in a row -- Textron (NYSE: TXT  ) has consistently outperformed the Street's expectations. But never satisfied with past success, investors will be asking: "What have you done for us lately?" tomorrow morning. Let's see what answers the Q3 2008 news might hold.

What analysts say:

• Buy, sell, or waffle? A dozen analysts split their ratings equally between buy and hold.
• Revenues. On average, they're looking for sales to grow 10% to $3.6 billion.
• Earnings. Profits may be heading the other direction, falling 8% to $0.87 per share.

What management says:
Textron's evolving once again, Fools. Last month, management announced the sale of its Fluid & Power business to Clyde Blowers Limited for "up to" $645 million -- that's $526 million in greenbacks up front, with the balance made up of a promissory note, promises for incremental payments based on how the business works out for Clyde, and the offloading of certain liabilities on the buyer. (More on this in a moment.)

What management does:
But first, let's take a look at what Textron's done with the rest of its business. Basically, that consists of watching operating margins erode, but limiting the damage through cost controls at the operating level, with the result that on the bottom line, Textron's held its net steady for three quarters running. Not bad, but not as good as almost any rival you could name, in any of its several businesses: Honeywell (NYSE: HON  ) , United Technologies (NYSE: UTX  ) , General Electric (NYSE: GE  ) , and Lockheed Martin (NYSE: LMT  ) all have fatter bottoms (in a good way) than Textron.

Margins	3/07	6/07	9/07	12/07	3/08	6/08
Gross	25.8%	25.8%	26%%	26.3%	26.1%	25.4%
Operating	12.8%	12.8%	13.3%	13.5%	13.4%	13.2%
Net	5.3%	6.3%	6.8%	6.9%	6.9%	6.9%

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:
Now getting back to that Fluid & Power sale, I didn't have a chance to write about it at the time it was announced, so let me address it now. I like it.

Why? Two reasons:

• First, F&P is/was part of Textron's lowest margin business segment: industrial. Selling off the unit should therefore help to boost Textron's margins over time.
• More important, though, is the price. At nearly 1 times its annual sales of $675 million, Textron ditched F&P for a huge premium to the company's overall 0.4 times sales multiple -- meaning Textron scored a premium price for a substandard profits generator.

I call that smart business.

For further Foolishness on Textron, read:

• Textron Flies High
• Hey! Who's Flying This Thing? Part 2
• Textron's Boastful CEO Is on the Money