Why Textron Stock Slumped Today

Key Points

• Textron beat on sales and earnings this morning -- then sold off.

• The company's sales didn't grow much, and its earnings grew almost none at all.

• Free cash flow at Textron backs up only 69% of reported net income.

• 10 stocks we like better than Textron ›

Textron (NYSE: TXT) stock tumbled to close down 7.1% Thursday, despite beating analyst forecasts this morning.

Heading into the quarter, Wall Street had Textron pegged for a $1.45 per-share profit on $3.65 billion in quarterly sales. In fact, Textron earned $1.55 per share on sales of $3.7 billion.

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Textron Q2 earnings

That sounds pretty good, except for a couple of things. For one, earnings as calculated according to generally accepted accounting principles (GAAP) were only $1.35 per share, with $1.55 being only a non-GAAP result. For another, even the non-GAAP number was up only $0.01 over what Textron reported a year ago -- and this despite Textron growing sales 5.4% year over year.

In other words, sales were up modestly, boosted by commercial aircraft and helicopter sales, as well as new revenue from the company's MV-75 tiltrotor aircraft. But profit margins on those sales were down.

Free cash flow for the quarter was $317 million, up from $309 million earned one year ago.

Is Textron stock a sell?

With $816 million in trailing-12-month net income and a $14.6 billion market capitalization, Textron stock sells for a P/E ratio of just under 18. That wouldn't be a bad price for a company growing earnings double-digits, and paying a nice dividend yield. Unfortunately, Textron's earnings are struggling to grow even low single digits, and its dividend yield is a measly 0.1%.

Even worse, based on the latest data, Textron is generating only about $0.69 in real free cash flow for every $1 in net profit it reports. Thus, Textron's price-to-free cash flow ratio works out to closer to 26 -- far too expensive for the slow growth rate.

I fear that makes Textron stock a sell.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Textron. The Motley Fool has a disclosure policy.