When Textron (NYSE: TXT) beat earnings Wednesday and sparked a double-digit mad dash by investors to raise its stock price, my fellow Fool Matt Koppenheffer quickly chimed in with this observation: "it's a good enough report … [but] I'm not quite sure [it justifies] the reaction that the stock is having."
Well I, for one, am sure … that it does not justify the price spike.
Too soon, Textron
Oh, I admit that on the surface, Textron's news was good. The company's struggling Cessna division is back in the black. Quarterly profits of $0.29 beat expectations by a nickel. But after you get past these pros, consider the cons:
- Revenue growth for the quarter was basically nonexistent. (Contrast that with the strong single-digit growth United Technologies (NYSE: UTX) reported Wednesday.)
- Manufacturing cash flow declined $15 million before pension contributions were subtracted.
- Despite beating expectations for Q2, Textron declined to raise its guidance for the rest of this year. In reiterating a plan to earn $1 to $1.15 per share in profits, Textron seems to suggest that whatever overage it earned in Q2 could have simply been borrowed from earnings for quarters three and four.
Management tells us that manufacturing cash flow (again, not counting pension contributions) for the full year could be anywhere from $800 million to $850 million. But so far this year, all Textron has managed to do is burn cash. Once you factor in pension contributions, net cash from ops of $146 million for the first half of 2011 was more than canceled out by capital expenditures of $169 million.
Result: If you accept at face value Textron's promise to ramp operating cash flow in the second half, and if you further assume that there will be no additional pension contributions (which Textron is not promising, by the way), I still don't see how the company can do better than $550 million in free cash flow under the most optimistic scenario.
Foolish takeaway
Best case, this would leave us with a company selling for an enterprise value-to-free cash flow ratio of about 22 at year's end. If Textron can hit consensus forecasts for 23% long-term growth, that's a pretty nice price -- but we only get it if absolutely everything goes right for Textron in the second half. Miss the top estimate for cash flow, and the buy thesis goes bust. Factor in more FCF-draining pension contributions -- likewise.
Long story short: I'm with Matt on this one. I don't see what all the fuss is about.
Unless, of course, Textron is lowballing us on what it thinks it can earn in the second half. Is that a possibility? Add Textron to your Fool Watchlist, and find out.
