Why Textron Stock Popped on Thursday

Textron (NYSE:TXT) shares soared 13% through 10:50 a.m. ET Thursday after crushing earnings this morning.

Heading into Textron's Q3 report, analysts expected the aerospace and defense company to earn only $1.43 per share on a bit less than $3.8 billion in sales. In fact, Textron earned $1.76 per share -- and hit $3.8 billion in sales on the nose.

Image source: U.S. Navy.

Textron Q3 earnings

That news wasn't quite as good as it sounds. Turns out, Textron's "$1.76" per share was only a non-GAAP number; actual earnings calculated under generally accepted accounting principles (GAAP) were only $1.56 per share. Still, this was up 19% from one year ago, with only 4% revenue growth.

Sales in the Textron Systems armored vehicle division drove revenue performance in the quarter, rising 16%, and commercial aviation sales were also strong, rising 14%. Only sales in the Bell helicopter division lagged, declining by 9%. (Industrial sales were roughly flat year over year, up just 1%.)

Textron's cash performance was even more impressive. Relative to the company's $266 million in reported net profit, Textron generated 54% more free cash flow -- $410 million -- and grew that number 51% year over year.

What's next for Textron stock

With cash profits surging, Textron raised its guidance through the end of this year. GAAP profits are now expected to range from $5.64 to $5.74 (so $5.69 at the midpoint, giving Textron stock a 15.7x price-to-earnings ratio.) The free cash flow forecast is similarly strong, with Textron raising its best guess to $800 million to $900 million. On a $13.5 billion market capitalization, that works out to about a 15.9x price-to-free cash flow ratio.

With analysts forecasting Textron's earnings to grow by less than 11% over the next five years, that looks a little expensive to me.

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