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Can Industrial Segment Boost Textron’s (TXT) Q1 Earnings?

Zacks

Textron Inc. TXT, known for brands like Bell Helicopter and Cessna Aircraft, is scheduled to report first-quarter 2018 results, before the market opens on Apr 18.

We expect sales growth at the Industrial segment, which accounts for the majority of Textron’s top line, to drive first-quarter revenues. However, the rebound in the Bell segment in the last reported quarter may not continue in the to-be-reported quarter.

Let’s discuss these factors in detail.

Industrial Segment — Remains a Key Catalyst


Textron’s Industrial segment designs and manufactures automotive engine components, specialized vehicles as well as varied industry-related tools and equipment. While management expects the Arctic Cat acquisition to continue driving this segment, innovation of specialized vehicles is anticipated to provide more impetus. In line with this, Textron launched HF600 heavy-duty reel mower, new models of GA Aerator Series, TR Series trim mowers as well as Cushman Hauler 800 and 800X utility vehicles in the first quarter.

Meanwhile, improved demand in the snow retail channel has been lately driving sales at this unit and is expected to do the same in 2018. These developments altogether are anticipated to substantially boost segmental revenues in the yet-to-be reported quarter. In line with this, the Zacks Consensus Estimate for this segment’s first-quarter sales is pegged at $1 billion, reflecting a 4.1% improvement from the prior-year quarter’s $961 million.

Will the Bell Segment Weigh on Growth?

The Bell segment, managed to deliver improved results in the third and fourth quarters of 2017, after showing weak performance in many of the prior quarters. However, management fears that the segment may again see a drop in sales on account of lower military volumes.

With management expecting lower military sales throughout 2018 and dearth of contract inflows from the Pentagon in the first quarter, we expect the upcoming results to reflect decline in revenues at the Bell segment. In line with this, the Zacks Consensus Estimate for the segment’s first-quarter sales is pegged at $680 million, reflecting a 15% decline from the prior-year quarter’s $800 million.

Other Factors at Play

In addition to the afore-mentioned factors, Textron expects to witness higher aftermarket revenues driven by increased aircraft utilization. This, in turn, is likely to boost first-quarter sales. The Zacks Consensus Estimate for Textron’s total sales is pegged at $3.11 billion, reflecting a year-over-year rise of 0.7%.

Moreover, since the beginning of 2018, the company has adopted a revenue recognition accounting standard. As a result, Textron expects an increase in retained earnings of approximately $90 million in the first quarter of 2018, with no restatement of prior periods.

The company is also expected to incur lower corporate tax expenses in 2018, thanks to the U.S. government’s latest tax reform. This, in turn, may get reflected in the form of improved bottom-line growth in the upcoming results. Notably, the Zacks Consensus Estimate for Textron’s first-quarter earnings is pegged at 46 cents, in line with the year-ago quarter’s figure.

Textron Inc. Price and EPS Surprise

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

What Does the Zacks Model Predict?

Our proven model shows 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 the case here as you will see below.

Zacks ESP: Textron has an Earnings ESP of +5.00%. 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. You can see the complete list of today’s Zacks #1 Rank stocks here.

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.

Other Stocks to Consider

Here are some other 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:

Boeing BA is expected to report first-quarter 2018 results on Apr 25. The company has an Earnings ESP of +1.70% and a Zacks Rank #2.

Raytheon RTN is expected to report first-quarter 2018 results on Apr 26. The company has an Earnings ESP of +1.22% and a Zacks Rank of 2.

General Dynamics GD is expected to report first-quarter 2018 results on Apr 25. The company has an Earnings ESP of +0.18% and a Zacks Rank #3.

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