Time to Buy Textron?

Well, whaddya know! The old saying was right: The third time really was the charm for Textron (NYSE: TXT).

The aerospace conglomerate -- maker of Bell helicopters, Cessna airplanes, and Shadow unmanned aerial vehicles -- reported earnings yesterday. Here's the damage report:

• Revenue dropped 29% year over year.
• Textron lost $0.22 per share.
• And free cash flow from the company's manufacturing operations (i.e., everything but Textron Financial) was an anemic $27 million.

Yet bad as it all sounds, for the third time running, the damage was less severe than Wall Street had feared, sparking a 17% spike in the share price. Textron earned $0.08 per share last quarter under its preferred pro forma method of accounting, versus the $0.03-per-share loss that analysts had 'em pegged for.

More importantly, Textron -- especially its financial unit -- is working hard to pull itself out of the financial mess. The issues that have battered its share price over the last year aren't all that different from those facing honest-to-goodness bankers like Bank of America (NYSE: BAC) and Citigroup (NYSE: C). If anything, they lie closer to industrial powerhouses that developed banking aspirations (I'm talking to you, General Electric (NYSE: GE) and Harley-Davidson (NYSE: HOG). Textron grew its financial unit too large in recent boom years, and it was dogged by persistent liquidity concerns. It looks like the company's finally pulled itself out of that quagmire to establish a steadier footing.

According to the balance sheet, Textron Financial unloaded 8.8% of its troubled assets over just the last six months. Even better, it does not appear to have taken too much of a bath in the process. Liabilities at this subsidiary are down only 7.6%. And while we'd certainly rather see liabilities fall faster than assets, the gap here isn't unreasonably wide for a planned retreat from the banking market.

Meanwhile, Textron further shored up its balance sheet with a series of stock and convertible note offerings, and secured a $500 million facility from the U.S. Export-Import Bank. All of which has helped it shift a sizeable chunk of its short-term obligations off into the long-term (by which time, Textron hopes the economy will have recovered somewhat.)

Does that sound like a pipe dream? Perhaps. But CEO Lewis Campbell is already seeing "early signals of stabilization late in the quarter in the business jet market" (A sentiment echoed by Gulfstream-maker General Dynamics (NYSE: GD). And while sales remain weak for now, forcing Textron to walk back estimates for the year, the firm still believes it could generate as much as $400 million in annual manufacturing free cash flow by year-end.