Can Textron (TXT) Pull a Surprise this Earnings Season?

Textron Inc.TXT is set to report third-quarter 2016 results on Oct 20, before the market opens.

Last quarter, the company posted a positive earnings surprise of 4.76%. Moreover, the company surpassed the Zacks Consensus Estimate in three of the past four quarters, with an average beat of 2.78%.

Let's see how things are shaping up prior to this announcement.

TEXTRON INC Price and Consensus

TEXTRON INC Price and Consensus | TEXTRON INC Quote

Factors at Play

Textron is a multi-industry company that is well-known for its brands such as Bell Helicopter, Cessna Aircraft Company, Jacobsen, Kautex, E-Z-GO and Greenlee . Apart from manufacturing aircraft, automotive engine components and industrial tools as well as offering associated services; the company operates as a commercial finance corporation in select markets.

For full-year 2016, the company reiterated its guidance. For the third quarter, management expects to record an income tax benefit including the reversal of accrued interest of approximately $315 million, of which approximately $200 million, or 74 cents per share, is attributable to continuing operations. This settlement will result in an immaterial net benefit to consolidated cash during 2016.

Moreover, at its Aviation segment, the increased delivery of jets in the second quarter has raised Textron's hopes of strong end-customer demand in the near term.

Among the notable third-quarter highlights, the approval from the company's management for its business restructuring program hogged the spotlight. Through this, Textron plans to cease production of cluster bomb, which has been witnessing declining demand. The initiative also entails the consolidation of the Jacobsen turf-maintenance brand with the Textron Specialized Vehicle business.

Overall, the restructuring drive will result in layoffs, consolidation of operations and asset impairments. Consequent to the restructuring, Textron expects to incur pre-tax charges in the range of $110-$140 million in the third quarter of 2016. Severance and associated costs are projected in the band of $40-$55 million.

The company also anticipates contract termination and other facility closure charges of $25-$30 million and asset impairment charges of $45-$55 million. Moreover, demand in the company's end markets, particularly in the commercial helicopter business, is expected to remain a potent headwind.

Geographically the company's business in Brazil and the Middle East is expected to be fraught with risks, given the macroeconomic and socio-political issues prevailing in the economies.

Earnings Whispers

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. That is not the case here as you will see below.

Zacks ESP: Textron has an earnings ESP of 0.00%.That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 66 cents.

Zacks Rank: Textron has a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, a 0.00 % ESP makes surprise prediction difficult.

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

Stocks to Consider

Here are some companies you may want to consider as our proven model shows they have the right combination of elements to post an earnings beat in the upcoming quarter:

L-3 Communications Holdings Inc. LLL has an Earnings ESP of +2.75% and a Zacks Rank #2 (Buy). The company will report quarterly results on Oct 27, 2016.

General Dynamics Corporation GD , slated to report on Oct 26, 2016 has an Earnings ESP of +0.84% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here .

Northrop Grumman Corp. NOC has an Earnings ESP of +0.36% and a Zacks Rank #3. The company is scheduled to report results on Oct 26, 2016.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>

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

NORTHROP GRUMMN (NOC): Free Stock Analysis Report

GENL DYNAMICS (GD): Free Stock Analysis Report

TEXTRON INC (TXT): Free Stock Analysis Report

L-3 COMM HLDGS (LLL): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.