Will Bell Segment Impair Textron's (TXT) Q3 Earnings?

As the third-quarter earnings season rings in, defense stocks are gearing up to report their quarterly numbers. Multi-industry conglomerate Textron Inc. TXT, well-known for its brands like Bell Helicopter and Cessna Aircraft, is scheduled to report its financial results on Oct 19, before the market opens.

We expect sales growth in the Industrial segment, which constitutes a majority of Textron’s top line, to drive the company’s revenues. However, Bell segment continues to be a laggard, as witnessed in the past few quarters. Nevertheless, regular orders continue to provide an impetus to the company.

Let’s discuss these factors influencing Textron’s quarterly results, in brief.

Industrial Manufacturing — A Catalyst

Textron’s Industrial segment designs and manufactures variety of products including automotive engine components, specialized vehicles and varied industry-related tools and equipments. Within this segment, along the specialized vehicle business line, the acquisition of Arctic Cat — a leader in the recreational vehicle industry — in the first quarter of 2017, has been boosting the company's growth trajectory.

Apart from gaining synergies from inorganic growth, this segment has also been benefiting from product innovation. It is worth mentioning in this context, the highly efficient ELiTE series lithium powered golf cars, which come with zero battery maintenance. Notably, the company delivered 8,000 units of this car, as of July, since its introduction earlier this year. All these factors led to an improved year-over-year expectation for Textron’s Industrial segment in the third quarter. Evidently, the Zacks Consensus Estimate for this segment’s third quarter sales is pegged at $1.1 billion, reflecting a solid 28% rise from prior-year quarter’s sales of $886 million.

Will Bell Segment Dent Textron’s Growth?

Bell, another significant segment for Textron has been consistently delivering poor performance over the past few quarters. This time too the company expects its top line to be adversely affected due to this segment’s weak performance.. Notably, the consensus estimate for this segment’s third-quarter sales is pegged at $765 million, down 3% year over year.

Nevertheless, this segment has been witnessing strong commercial orders, of late, for products like 407 GXPs, 412 EP helicopters as well as 505 Jet Ranger X choppers. Taking into account such solid orders, the segment’s profit has been increasing and management expects similar result in the third quarter as well. In line with this, our consensus estimate projected for $95 million profit for Bell, up 10.5% year over year.

Other Factors at Play

In addition to the aforementioned facets of Textron’s quarterly results, a steady inflow of orders for the company’s varied products from Pentagon can be expected to provide an impetus to its third-quarter sales. Among the notable deals that Textron won in the quarter, worth mentioning is the Aerospace Systems Air Platform Technology Research program contract worth $499 million. Per the terms of the deal, the company will offer quality research to Air Force in developing, demonstrating, integrating and transitioning new air vehicle technologies and systems.

On the flip side, improving pricing in the aviation market has not been able to boost the company’s aviation segment as evident from a declining year-over-year sales expectation for this unit. Our consensus estimate called for sales of $1.2 billion in third quarter, down 3% year over year.

As a whole, for the third quarter, the Zacks Consensus Estimate for earnings is pegged at 62 cents, down 43.54% year over year, while the consensus for revenues is estimated at $3.54 billion, implying an 8.84% year-over-year increase.

Textron Inc. Price and EPS Surprise

 

Textron Inc. Price and EPS Surprise | Textron Inc. Quote

 

Earnings Whispers

Our proven model does not conclusively show that Textron is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: Textron has an Earnings ESP of +2.24%. This is because both the Most Accurate estimate is pegged at 64 cents, higher than the Zacks Consensus Estimate of 62 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Textron currently carries a Zacks Rank #4 (Sell), which makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are some defense companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Huntington Ingalls Industries, Inc. HII is expected to report third-quarter 2017 results on Nov 8. The company has an Earnings ESP of +0.58% and a Zacks Rank #1.

The Boeing Company BA is expected to report third-quarter 2017 results on Oct 25. The company has an Earnings ESP of +0.33% and a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.

Leidos Holdings, Inc. LDOS is expected to report third-quarter 2017 results on Nov 2. The company has an Earnings ESP of +3.75% and a Zacks Rank #3.

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