Stock Picks: TXT Up, LTD Down

Shares of defense and aerospace contractor Textron (TXT) took wing Tuesday after it posted unexpectedly better earnings results. Shares of the Providence, R.I.-headquartered company were up 7.8% in midday trading.

Textron, which makes Bell helicopters, Cessna civilian aircraft and unpiloted drones, as well as electronics and munitions systems, posted a profit of a penny a share. That's a huge drop from its 83 cents a share profit from a year ago, but better than the average Wall Street estimated loss of two cents a share. Textron said full-year earnings should reach the upper end its 33 cents to 63 cents a share forecast.

The company has been hampered by its finance business, which was hurt badly by the credit crunch and required liquidation of many of its assets over the spring. “Our businesses have reduced costs in reaction to the dramatic market slow-down that we experienced over the past year and that was evident in our third quarter operating results," President Chief Operating Officer and CEO-elect Scott Donnelly said in a conference call.

Averting a loss is good news, but probably not enough to push the stock so dramatically. That would come in part from the relatively high level of short interest in Textron, meaning investors holding 7.4% of its publicly traded stock expected it to go down. The good news pushed up share prices and forced short sellers to unwind their positions, driving prices up further in a classic short squeeze.

Morningstar analyst Anil Daka says the span and scope of Textron's businesses will leave its results uneven for some time. "I look at Textron's businesses, and they have a couple of Dr. Jeckyl and Mr. Hyde aspects," he says.

"Bell and Cessna and to some extent Textron Systems are good businesses, but the financial unit has really been a drag on them, so it's a mix of good and bad businesses." The financial engineering done by management has staved off liquidity concerns and helped dig the worst hit units out a bit, he adds: "Right now they're in a pretty decent cash position, so there are lesser fears that they will run out of cash.”

Bottom Line: Sell
Take advantage of the brief pop for some profits and wait for a more attractive re-entry point later in the year.

Apparel and gift retailer Limited Brands (LTD) on Tuesday stayed out of fashion with investors after it forecast slumping same-store sales. Shares were down 5.4% by midday.

The Columbus, Ohio-headquartered parent of Victoria's Secret, Bath & Body Works and Henry Bendel brands raised its third-quarter outlook to breakeven to a loss of 4 cents a share, up from a previous estimate of a loss of 7 cents to 12 cents a share. Wall Street analysts, on average, estimated a loss of 5 cents a share.

However, Limited also said in a prepared statement that it now expects same-store sales to decline by a low-to-mid single digit percentage, worse than a previous estimate of flat same-store sales.

The company will provide fourth quarter earnings guidance on its third quarter earnings call on Nov. 19, but meets today with analysts and investors.

Analysts took in the news with varied reactions. BMO Capital Markets analyst John Morris said the higher earnings forecast reflected improved margins at Bath & Body Works, but also said Victoria's Secret lost some sales momentum, largely though a 12-day sale in September that "likely borrowed sales volume from the month of October."

The sag by Vitoria's Secret is company specific, Jefferies & Co. analyst Randal Konik wrote Tuesday, "and is not representative of the broader retail landscape which we think is solid in October."

Jesup & Lamont analyst Barbara Wyckoff said Limited will be boosting its holiday strategy, and expect it to have cleared up inventory balance issues that weighed down results last year.

"We hope to come away from the meeting with confidence LTD can enter 2010 with a winning strategy in order to regain market share and rebuild margins," she wrote of the analyst day conference.

Bottom Line: Hold
The holiday season is crucial, and it's too early to tell if shoppers can support growth.