Wall Street was not impressed with the quarterly results Textron (NYSE:TXT) delivered last week, sending shares of the industrial conglomerate down 4% post-earnings. The company actually posted better-than-expected earnings during the three months ending Sept. 30, but investors were more focused on a revenue miss and Textron's tepid outlook for the full year.

It's a familiar refrain for Textron, which has seen its shares greatly underperform the S&P 500 over the past year due to a series of misfires spread across different parts of its portfolio. Last fall, troubles in its industrial businesses, and specifically its snowmobile unit, were cause for concern. This summer, weak commercial aerospace sales were the culprit.

TXT Chart

TXT vs. S&P 500. Data by YCharts.

Textron is clearly in a rut, but the company does have a path to potentially break free of the malaise. Here's a look at the latest results, with an eye toward how the company might win over skeptical investors in the years to come.

No momentum

Textron earned $0.95 per share in the third quarter on revenue of $3.26 billion, beating the earnings per share consensus estimate by $0.10 despite falling just short on revenue. Much of that beat is attributable to lower taxes, with operating profit in line with expectations.

Textron, a maker of everything from business jets to golf carts, was aided by stronger-than-expected margins at its Bell helicopter unit and its military operations, but its aerospace and industrial units were weaker than analysts had hoped. Aerospace also caused a $100 million hit to free cash flow due to Cessna Longitude business jet delivery delays, and Textron cut its full-year free cash flow guidance because of the delays.

The Bell 525 helicopter on a tarmac.

Textron's Bell 525 helicopter. Image source: Textron.

Textron also narrowed its full-year earnings guidance to $3.70 to $3.80 per share, from $3.65 to $3.85.

Investors had been hoping to see a pickup in business jet orders fueled by Textron's refreshed lineup, but the book-to-bill ratio remained stubbornly around 1.0. On a call with investors, CEO Scott C. Donnelly said, "It's not a horrible market" but admitted "we do see some softness, as we saw sort of in the latter part of quarter two." He blamed the softness on overall economic uncertainty.

We saw again in the latter part of Q3, just uncertainty in the end market and some customers who have been in discussions and clearly intend to buy new aircraft debating do I do it now, do I wait. And again, I think we would rather take prudent action and not go out and try to use, try to incentivize those transactions to happen if they're going to move into next year. Then they move into next year, but there is no reason after all the work we've done to try to get pricing back to a healthy level that we should compromise that.

The Pentagon to the rescue?

Textron's commercial aviation business has a good lineup but is likely to be weighed down by new program start-up costs and could be vulnerable in the event of a global slowdown. Similarly, it's also hard to see a surge in growth in recreational vehicles at this point in the economic cycle. The one area of the business that could spark substantial near-term growth is the company's military operation.

An illustration of Bell's V-280 Valor dropping off troops in a desert setting.

Rendering of Bell's V-280 Valor. Image source: Textron.

Bell's V-280 Valor is one of two contestants in the Army's Future Long Range Assault Aircraft competition, and it is also one of five competitors in a separate Future Attack Reconnaissance Aircraft competition. Within six months, Textron could have awards to continue development of both platforms, and could easily win one, if not both, of these multibillion-dollar final awards.

Textron has other irons in the fire as well. A Textron unit is one of the finalists in a competition to manufacture the Army's next squad weapon and is also in the running for a number of drone awards.

Of course, it is far too early to assume wins in any of these competitions, but the potential is there for a military surge in the years to come that appears to be the best chance to drive shares of Textron higher. The U.S. government accounted for less than 30% of Textron's $14.2 billion in total sales in 2018. Investors should hope to see that number climb in the years to come if Textron is to outperform.

Something has to give

Textron needs a spark, and its military pipeline appears the most likely source. Absent some defense wins, expect to hear more talk of a breakup. The company currently trades for less than 13 times forward earnings estimates, well below top diversified industrial companies and more-focused aerospace and defense contractors, and seems a ripe target for fresh activist attention.

TXT PE Ratio (Forward) Chart

TXT P/E ratio (forward). Data by YCharts.

Textron has announced plans to explore options for its Kautex auto-focused business, but so far has not followed in the footsteps of industrial peers including Honeywell and United Technologies in pursuing large-scale divestitures or corporate breakups. It is easy to imagine a call to carve out the company's military and commercial aviation units into one stand-alone $8 billion aerospace and defense company.

On the post-earnings call, Donnelly downplayed further splits, arguing that the businesses in the portfolio have historically generated strong results and worked well together. That may be the case. But absent some wins on the military side of the portfolio, he should expect to hear more and more questions about what the future holds for Textron.