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Will Lower Sales Projections Hit Textron's (TXT) Q4 Earnings?

Zacks Equity Research

Textron Inc. TXT is scheduled to report fourth-quarter and full-year 2018 results on Jan 24, before market open.

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

Let’s discuss these factors in detail.

The Industrial Segment: No More a Solid Contributor

Textron’s Industrial segment designs and manufactures automotive engine components, specialized vehicles as well as varied industry-related tools and equipment. Although the introduction of new specialized vehicles has been a key catalyst for this segment, lately unfavorable operating performance of these products have been hurting the segment. Moreover, divestiture of this segments tools and test product line is expected to drag down its fourth-quarter revenues.

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In line with this, the Zacks Consensus Estimate for the Industrial segment’s fourth-quarter sales is pegged at $1,033 million, reflecting a 9.3% decline from the prior-year quarter’s $1,139 million.

Textron Inc. Price and EPS Surprise

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

The Bell Segment Reflects Gloomy Outlook

Lately lower commercial revenues due to an unfavorable mix of aircraft sold has been hampering the Bell segment’s top line. Dearth of notable commercial contract news in the soon-to-be reported quarter have made us skeptic about this segment’s top-line growth in the fourth quarter.

The Zacks Consensus Estimate for the segment’s fourth-quarter sales stands at $935 million, mirroring a 4.9% decline from the prior-year quarter’s $983 million.

Other Factors at Play

At the company’s Textron Systems business segment, it has been witnessing lower volumes due to the discontinuance of the sensor-fuzed weapon product line. Consequently, the unit is witnessing soft sales for past few quarters. Moreover, lower Tactical Armoured Patrol Vehicle (TAPV) deliveries have been dragging this unit. Expecting these trends to continue, any near-term sales rebound remains unlikely. So majority of Textron’s segments are projected to reflect sales decline, indicating at a dismal total sales performance.

To this end, for Textron’s fourth-quarter total sales, the Zacks Consensus Estimate is pegged at $3.92 billion, mirroring a year-over-year decline of 2.4%.

Meanwhile, gains from the tools and test divestiture are expected to boost Textron’s bottom-line growth. The Zacks Consensus Estimate for fourth-quarter earnings is pinned at 99 cents, reflecting 33.8% improvement year over year.

What Does the Zacks Model Predict?

Our proven model shows that Textron is not likely to beat earnings in the fourth 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.

Earnings ESP: Textron has an Earnings ESP of 0.00%. 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).

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

Stocks to Consider

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

General Dynamics GD is expected to report fourth-quarter 2018 results on Jan 30. The company has an Earnings ESP of +2.21% and a Zacks Rank #3.

L3 Technologies, Inc. LLL is expected to report fourth-quarter 2018 results on Jan 29. The company has an Earnings ESP of +0.37% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Huntington Ingalls Industries, Inc. HII is expected to report fourth-quarter 2018 results on Feb 14. The company has an Earnings ESP of +11.85% and a Zacks Rank #3.

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