Textron Inc. (TXT) is slated to release its second quarter 2014 financial results before the market bell on Jul 16, 2014. The company posted a negative earnings surprise of 10.00% in the preceding quarter. Textron currently has a Zacks Rank #3 (Hold). Let’s see how things are shaping up prior to this announcement.
Factors to Consider
This aerospace and defense firm continues with its systematic inorganic growth initiatives along with the expansion of its product and service portfolio. The current sequestration wave has drove defense players like Textron to resort to acquisitions. In fact, dwindling military spending and industry uncertainty have led standard defense operators to consolidate their businesses beyond the core military sector.
Textron has completed quite a few acquisitions this year, including TUG Technologies Corp. and Beech Holdings, LLC. These acquisitions are proving to be profitable considering the delivery of the terms of delivering first eight King Air aircraft during the first quarter. The acquisition of Beech Holdings’ businesses is expected to contribute roughly $1.5 billion to the company’s 2014 revenues under the Textron Aviation division.
In a climate of budget cuts and sequestration, foreign military sales offer some respite and an alternative source of revenue for the defense companies. In May, a Textron unit, Textron Defense Systems, was chosen by South Korea for the supply of anti-armor weapons to strengthen its arsenal in response to North Korea’s growing nuclear threat. The contract had a value of $190.1 million.
Although acquisitions in the past have helped the company to expand its core offerings, Textron failed to receive a steady flow of contracts from the Pentagon during the second quarter. U.S. budget deficits and political uncertainty, added to intensifying competition might challenge the company’s future performance.
Earnings Whispers
Accordingly, our proven model does not conclusively show that Textron is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here.
Negative Zacks ESP: The Most Accurate estimate stands at 46 cents while the Zacks Consensus Estimate is pegged higher at 47 cents, resulting in a -2.13% ESP.
Zacks Rank #3 (Hold): The Zacks Rank #3 notwithstanding, the company’s negative ESP does not make us confident of a likely earnings beat. Meanwhile, we caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement.
Other Stocks to Consider
Here are some companies in the aerospace and defense space having the right combination of elements to post an earnings beat this quarter.
Huntington Ingalls Industries, Inc. (HII) has an earnings ESP of +2.20% and carries a Zacks Rank #2 (Buy).
Northrop Grumman Corp. (NOC) has an earnings ESP of +0.91% and carries a Zacks Rank #2 (Buy).
B/E Aerospace Inc. (BEAV) has an earnings ESP of +1.85% and carries a Zacks Rank #2 (Buy).
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