For three straight quarters, Textron (NYSE:TXT) has been turning in earnings numbers that not only beat previous years' results but trounced analyst expectations to boot. When the defense contractor reports Q2 2006 earnings on Thursday, investors will be looking for more of the same. Will they be proved right?

What analysts say:

  • Buy, sell, or waffle? A dozen analysts try (often unsuccessfully) to chart Textron's flight path. They give the stock 10 buy ratings and a pair of holds.
  • Revenues. The analysts believe Textron's sales will fall 15%, to $2.7 billion.
  • Earnings. But they expect to hear tomorrow that profits rose 42% to $1.22 per share.

What management says:
Last quarter, CEO Lewis Campbell boasted of strong organic growth, fueled by introductions of new products, strong global demand for the same, and improved operational efficiency. With the company's business firing on all cylinders, Campbell upped earnings guidance for the year by a nickel and predicted $550 million to $600 million in free cash flow, while holding his prediction for tomorrow's results at somewhere between $1.15 and $1.25 per share in net earnings.

Major contributors to last quarter's success were increased revenue on government contracts for the V-22 Osprey and development of the Armed Reconnaissance Helicopter in the Bell unit, and improved sales of Citation business jets under the Cessna division. On the latter factor, investors in Textron's competitors should take note of Campbell's observation that pricing for the Citation was "favorable" -- suggesting broader strength in the business jet industry overall.

What management does:
On the margins front, as you can see below, rolling gross margins have been contracting for three straight quarters. However, matching up nicely with Campbell's assertion of operational improvements, operating margins have been improving over the same time period. Although you don't see this showing up on the bottom line yet, that's due to a pair of $300 million-plus one-time charges to earnings incurred in the final two quarters in 2005 -- charges we hope will remain "one-time" and not recur in the future.

Margins %

1/05

4/05

7/05

10/05

12/05

4/06

Gross

24.7

26.0

25.4

25.5

25.4

25.2

Op.

10.2

11.1

11.3

11.3

11.4

11.6

Net

4.4

5.5

5.3

2.3

2.0

2.4
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:
Returning to Campbell's promise of strong free cash flow for the year, I'd point out that while nothing's ever certain, management has certainly been making the right moves toward achieving this result. With sales up 20% year over year in the past six months, the company has allowed inventories to rise only 8% during the period. Meanwhile, it's done an admirable job in getting customers to pay their bills on time. Accounts receivable over the past six months have actually declined 13% even as revenues soared. That's precisely the kind of working capital management that keeps the free cash flow spigots open.

Competitors:

  • Alliant Techsystems (NYSE:ATK)
  • Embraer (NYSE:ERJ)
  • First Aviation (NASDAQ:FAVS)
  • Parker-Hannifin (NYSE:PH)
  • TRW (NYSE:TRW)
  • United Technologies (NYSE:UTX)

In related news, fellow Fool Stephen Simpson recently highlighted a risk to the "favorable" pricing in Textron's business jet line that Campbell mentioned. Rival and Motley Fool Stock Advisor pick Embraer is working on a new line of business jets in an effort to steal market share from competitors such as Textron. Read all about it in "A Pocket of Turbulence for Embraer."

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Fool contributorRich Smithdoes not own shares of any company named above.