Shares of defense contractor Textron (NYSE:TXT) are soaring this morning, with the stock up 7.7% at last count in response to a Q4 earnings release that quite simply blew analyst estimates out of the water. In Q4, Textron reported:
- $0.60 per share in earnings from continuing operations, up 20% from last year's Q4
- a 24% increase in cash flow from operations, before pension contributions, from the firm's manufacturing (i.e., nonfinance) divisions
- and revenues of $3.5 billion, up 4%.
When you consider that analysts had been predicting only $0.59 per share in profits and $3.4 billion in revenues, you can see why investors were pleased. That said, the "earnings beat" wasn't all that huge and the rest of Textron's news wasn't nearly as good.
For example, 2013's full-year earnings came in at $1.75, down 12.5% from last year's $2. That was completely out of proportion to the mere 1.1% slip in revenues, a fact owing to Textron's operating profit margin on these revenues slipping 130 basis points from 6.9% to 5.6%. Full-year free cash flow from manufacturing came to just $256 million, down 68% year over year, and only turning positive in the final quarter of the year.
What it means to you
So why are investors so optimistic about Textron, and are they right to be? The future will tell. And on the subject of the future, here's what Textron has to say. In 2014, the company expects:
- to pull in $13.2 billion in revenues, 9% better than in 2013
- to earn between $2 and $2.20 in profits on these revenues
- and to generate anywhere from $600 million to $700 million in cash flow, before subtracting $80 million in pension contributions, and perhaps $450 million (judging from years past) spent on capital investments.
In the best possible case, this should work out to a valuation of 17.4 times on Textron stock earnings by year's end. That prospect should frighten investors, given that most analysts agree that Textron stock is unlikely to show earnings growth in excess of 9% over the next five years. Meanwhile, Textron's outlook for free cash flow, perhaps $620 million after pension contributions, yields a similar price to free cash flow ratio. So the valuation doesn't look any better from that perspective -- and remember that these are both the best-case scenarios, based on Textron's predictions.
Long story short, with a valuation far in excess of what the stock's growth rate seems to justify, and a downright miserly dividend yield of just 0.2%, there's very little reason to want to own Textron at today's prices -- and no reason at all for investors to be bidding Textron stock up today.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.