Textron Inc. Books Back-to-Back Earnings Beats

Textron shares have fared poorly this year -- and there's a good reason for that.TXT Total Return Price data by YCharts.

This just in: For the second time in a row, Textron has beat analyst earnings estimates. Tuesday morning, the aerospace and defense giant reported a $0.63-per-share profit that topped analyst estimates by $0.02, despite missing revenue guesses by a substantial margin. Here's how the quarter went down:

Q3 revenues of $3.2 billion were down 7% from last year, and missed consensus targets for the quarter by 7% as well.
Operating profit margins expanded by 120 basis points, however, rising to 9.8%.
Interest and tax expense held pretty steady, and stock buybacks (the share count is down by about 1% year over year) further helped to boost profits.
Together, these combined to push Q3 2015 earnings of $0.63 per share up 10% in comparison to last year's Q3.

So much for accounting earnings. As far as cash profits go, operating cash flow from Textron's manufacturing operations (i.e., leaving finance out of the picture) grew in tandem with earnings, up 11%. Capital spending, however, grew much faster, up 36% year over year. As a result, Textron's actual free cash flow for the quarter came in at just $118 million -- which was down 6% year over year, and amounted to just 67% of reported net income.

The bad news from TextronThe upshot is that despite glowing headlines, and a warm reception from investors, Textron's quarter -- and its year -- really isn't as good as meets the eye.

Despite reporting respectable profits of $471 million for the first three quarters of this year, Textron has so far generated a paltry $61 million in actual cash profits through these first three quarters. That's a 74% decrease in comparison to where Textron was at this point last year.

ValuationSo where does all this leave Textron -- and its shareholders -- as we head into the fourth and final quarter of the year? Honestly, things aren't looking good.

According to management's latest guidance, Textron still expects to produce between $550 million and $650 million in cash from operations this year. Planned pension contributions have declined to just $70 million. But if we posit capital spending levels in line with recent years (where they've averaged $450 million, according to data from S&P Capital IQ), free cash flow for fiscal 2015 is only looking like it will fall in a range of $30 million to $130 million -- $80 million at the midpoint.

On one hand, that's right in line with how Textron has been performing all year long. On the other hand, it's a far worse number than the $680 million-odd that Textron is promising for net income ($2.40 to $2.50 per share).

This means that a stock costing only about 16.5 times current earnings expectations, when viewed from one perspective, can be just as easily described as costing 140 times free cash flow. Valued on earnings, Textron almost looks like a bargain within a defense industry averaging valuations of roughly 18.5 times earnings.

Valued on free cash flow, though, this stock turns out to be anything but cheap.

The article Textron Inc. Books Back-to-Back Earnings Beats originally appeared on Fool.com.

Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him on our public stockpicking service,Motley Fool CAPS, where he picks and pans stocks under the handleTMFDitty, and currently ranks No. 280 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.