Defense Stock Textron (TXT) To Beat Q2 Earnings Estimates

Textron Inc. (NYSE:TXT) is scheduled to report second-quarter 2016 results before the opening bell on Jul 22. Last quarter, the company had posted a positive earnings surprise of 3.77%. Out of the past four trailing quarters, it beat the Zacks Consensus Estimate thrice, with an average positive surprise of 2.01%.

Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Textron is likely to beat earnings this season because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat estimates, and Textron has the right mix.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +3.23%. This is because the Most Accurate estimate stands at 64 cents, while the Zacks Consensus Estimate is pegged slightly lower at 62 cents. This is a meaningful indicator of a likely positive earnings surprise.

Zacks Rank: Textron’s Zacks Rank #3, when combined with its positive ESP, make us reasonably confident of an earnings beat this quarter.

Conversely, Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

What’s Driving the Better-than-Expected Earnings?

Textron’s geographically diverse network of aircraft, defense & intelligence, industrial and finance businesses negates any specific business risk. The company is globally known for established brand names, such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee.

During the first-quarter 2016 earnings call, the company did not provide any guidance for the second quarter. It, however, reiterated the outlook for the entire year.

The company anticipates capital investments in research and development to remain flat for 2016. While this may hurt margins initially, it will eventually lead to more robust organic and bottom-line growth.

Moreover, Textron enjoys a continuous flow of contracts from the Pentagon and international allies. The company bagged a number of contracts in the second quarter as well. This includes a $116.5 million contract from the U.S. Army for upgrading 24 additional RQ-7B V2 Shadow Tactical Unmanned Aircraft System (TUAS), a $11 million contract from the Air Force to support its B-1B Lancer strategic bomber fleet by providing 12 Advanced Radar/Electronic Warfare Test Station (ARTS) Automatic Test Equipment (ATE) systems and a contract to provide the New Electronic Warfare Threat Simulator (NEWTS) for the Government of Canada. This is expected to fuel its top-line growth in the quarter.

However, the company expects flattish growth at Bell Helicopter this year. Soft V-22 Osprey shipments and weakness in the global commercial helicopter market could affect segment revenues and dampen the top line in 2016.

Stocks that Warrants a Look

Here are few other stocks that you may want to consider, as our model shows that they too have the right combination of elements to post an earnings beat this quarter:

Lockheed Martin Corporation (NYSE:LMT) has an Earnings ESP of +1.37% and a Zacks Rank #2. The company will report quarterly results on Jul 19, 2016.

Northrop Grumman Corporation (NYSE:NOC) has an Earnings ESP of +4.42% and a Zacks Rank #2. The company will report quarterly results on Jul 27.

General Dynamics Corporation (NYSE:GD) has an Earnings ESP of +2.17% and a Zacks Rank #2. The company will report quarterly results on Jul 27.

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