Will Textron's (TXT) Q3 Earnings Reflect Divestiture Gains?

Textron Inc. TXT is scheduled to report third-quarter 2018 results, before the market opens on Oct 18.

Possible sales growth at the Industrial and Bell segments, which together account for more than 50% of Textron’s top line, is expected to drive third-quarter revenues. Also, gains from divestiture to should boost earnings. 

Let’s discuss these factors in detail.

The Industrial Segment — A Solid Contributor

Textron’s Industrial segment designs and manufactures automotive engine components, specialized vehicles as well as varied industry-related tools and equipment. Innovation of specialized vehicles, particularly following the integration of the Arctic Cat, continues to boost the segment’s performance.

In line with this, Textron introduced new model of its E-Z-GO Express personal transport vehicles, havoc and wildcat xx models of vehicles as well as the fleet management shield plus technology in the third quarter.

These developments should keep this segment’s top line growing in the yet-to-be reported quarter, keeping up with its usual trend.

Textron Inc. Price and EPS Surprise

 

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

Bell Segment: Another Positive

The Bell segment has been generating improved results in past couple of quarters compared to weak performance delivered last year. In the second quarter, lower military revenues at this unit marred growth of higher commercial volume. However, in the third quarter, this unit bagged a few notable orders like the $510 million modification contract for delivering 29 units of AH-1Z new aircraft to U.S. Marine Corps. This, in turn, have made us optimistic about the Bell segment’s top-line growth in the third quarter.

The Zacks Consensus Estimate for the segment’s third-quarter sales is pegged at $811 million, reflecting a 6% improvement from the prior-year quarter’s $765 million.

Other Factors at Play

Within its Textron Systems business segment, the company has been witnessing lower volumes that are weighing on this unit’s sales due to the discontinuance of the sensor-fuzed weapon product line, for past couple of quarters. While management expects this unit to gain from the U.S. administration’s increased focus on unmanned aircraft systems, any near-term sales rebound remains unlikely.

In line with this, the Zacks Consensus Estimate for Textron’s third-quarter total sales is pegged at $398 million, mirroring a year-over-year decline of 27%.

Meanwhile, a one-time gain of approximately $400 million from the tools and test divestiture by Textron is expected in the third quarter. This should boost the company’s earnings growth. The Zacks Consensus Estimate for Textron’s third-quarter earnings is pegged at 76 cents, reflecting a year-over-year improvement of 16.9%.

What Does the Zacks Model Predict?

Our proven model shows that Textron is likely to beat earnings in third 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 the case here as you will see below.

Earnings ESP: Textron has an Earnings ESP of +0.24%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Textron currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Conversely, 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.

Key Picks

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

L3 Technologies LLL is expected to report third-quarter 2018 results on Oct 25. The company has an Earnings ESP of +0.35% and a Zacks Rank of 2.

FLIR Systems FLIR is expected to report third-quarter 2018 results on Oct 30. The company has an Earnings ESP of +2.66% and a Zacks Rank #2.

General Dynamics GD is expected to report third-quarter 2018 results on Oct 24. The company has an Earnings ESP of +0.09% and a Zacks Rank of 3.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
General Dynamics Corporation (GD) : Free Stock Analysis Report
 
Textron Inc. (TXT) : Free Stock Analysis Report
 
FLIR Systems, Inc. (FLIR) : Free Stock Analysis Report
 
L3 Technologies Inc. (LLL) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research