Will Bell Segment Rebound Aid Textron's (TXT) Q4 Earnings?

Textron Inc. TXT, known for brands like Bell Helicopter and Cessna Aircraft, is scheduled to report fourth-quarter 2017 results on Jan 31, before the market opens.

We expect sales growth at the Industrial segment, which accounts for the majority of Textron’s top line, to drive fourth-quarter revenues. Moreover, a rebound in the Bell segment after many quarters of weak
performance buoys optimism.

Let’s discuss these factors in detail.

Industrial Segment — A Key Catalyst

Textron’s Industrial segment designs and manufactures variety of products, including automotive engine components, specialized vehicles and varied industry-related tools and equipment. The acquisition of Arctic Cat — a leader in the recreational vehicle industry — made in the first quarter of 2017, has been boosting growth at this segment.

In fact, this buyout drove third-quarter sales by double digits at the segment. We expect the takeover to drive revenues at this segment in the fourth quarter as well. In line with this, the Zacks Consensus Estimate for this segment’s fourth-quarter sales is pegged at $1.2 billion, reflecting a solid 21.6% rise from the prior-year quarter’s $952 million.

Will Bell Segment Drive Growth?

Bell, another important segment for Textron, has been able to deliver improved results in the third quarter, after quarters of poor performance. In particular, strong demand for commercial jets drove the top line higher at this unit. With management expecting to maintain the upside in commercial deliveries, we expect the fourth-quarter results to reflect top-line growth at the Bell segment.

In line with this, the Zacks Consensus Estimate for the segment’s fourth-quarter sales is pegged at $918 million, reflecting a 3.5% rise from prior-year quarter’s $887 million.

Other Factors at Play

In addition to the aforementioned factors, improved growth pattern and performance and a steady inflow of orders from Pentagon are expected to provide an impetus to fourth-quarter sales. Among the deals clinched in the fourth quarter, the one worth mentioning is the $333-million contract from U.S. Army for up to 255 mobile strike force vehicles.

All these factors are expected to boost Textron’s fourth-quarter revenues, as is evident from the Zacks Consensus Estimate for sales of $4.04 billion, which reflects a year-over-year improvement of 5.6%.

However, the Zacks Consensus Estimate for fourth-quarter earnings is pegged at 75 cents per share, reflecting a decline of 6.25% year over year. This could be because the company generates a significant portion of its revenues from fixed-price contracts, exposing the bottom line to cost overruns.

Moreover, during the third-quarter earnings call, management announced that its vehicle business is lagging in terms of line rates and production output. These factors as well as a charge associated with the TAPV program incurred in the first quarter of 2017 have compelled management to slash the 2017 EPS guidance.

Textron Inc. Price and EPS Surprise

 

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

 

What Does the Zacks Model Predict

Our proven model does not conclusively show an earnings beat for Textron 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 -1.22%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Textron carries a Zacks Rank #3.

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 to Consider

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 HII is expected to report fourth-quarter results on Feb 15. The company has an Earnings ESP of +3.43% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1
Rank stocks here.

Curtiss-Wright CW is expected to report fourth-quarter results on Feb 21. The company has an Earnings ESP of +0.94% and a Zacks Rank #2.

AAR AIR is expected to report third-quarter fiscal 2018 results on Mar 20. The company has an Earnings ESP of +5.70% and a Zacks Rank #3.

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