For some years, there's been a movement afoot among large, high-quality public companies to give Wall Street the cold shoulder in response to its incessant clamoring for "forward earnings guidance." Companies such as Coke
Then there are the companies, like GE
And what was the market's reaction to this telescoping view into the company's bright future? First, apathy, as the stock slipped $0.30 in immediate post-announcement trading. Then, utter forgetfulness, as investors sold the stock off by a good 2.5%.
For the life of me, though, I can't fathom why investors reacted this way. If it was good forward guidance the market wanted, then I think the company's reiteration of its free cash flow expectations sufficed for the short term, and Campbell's long-term optimism was a bonus. If it was recent performance the market decided to focus on last week, then there, too, Textron performed just fine. Its revenue performance of $2.8 billion topped estimates by about 4%, and profits from continuing operations, sans a one-time charge for discontinued operations, came in at $1.34 per share -- about 10% higher than expected.
Although profitability declined slightly at Textron's Bell Helicopter division as the company made investments there, the firm's largest and most profitable unit, Cessna, reported both higher sales and profits. And Campbell made a point of highlighting the "favorable pricing and higher business jet volume" experience at Cessna.
With all of Textron's news being of the "good" variety, my hunch, therefore, is that investors are just plain nervous about the valuation. Even if it hits the high end of its free cash flow forecast, the firm's heavy debt load would give it an enterprise value-to-free cash flow ratio of roughly 31. That's pretty steep for a business expected to grow its profits at just 12% per annum over the next five years. And if that is the real reason for last week's decline, then Fools should beware: Textron must fall a lot more for its shares to return to a more reasonable price.
What is this "free cash flow" stuff, anyway? Turn to page 121 of your Foolish textbooks and read up on it in "Foolish Fundamentals: Free Cash Flow."
And enterprise value? We've got that one, too.
Fool contributor Rich Smith does not own shares of any company named above.