By Dena Aubin

NEW YORK, Oct 27 (Reuters) - Textron Inc surprised the
markets by posting a third-quarter profit on Tuesday, but the
diversified manufacturer may have more work to do before its
ratings are lifted out of the danger zone, analysts said.

With one junk rating already from Fitch Ratings, Textron
(TXT.N: Quote, Profile, Research) is rated at the lowest investment grade by Moody's
Investors Service and Standard & Poor's, both of which have a
negative outlook, indicating a cut to junk is a risk.

While Textron has earned kudos from analysts for averting a
liquidity crisis this year and winding down part of its
financial arm, ratings are not likely to get much of a lift,
even after the company managed to swing to a profit with heavy
cost-cutting.

"What we focus on is cash flow, and cash flow was pretty
much what I expected and probably will be for this year," said
Moody's analyst Robert Jankowitz. There was nothing new on the
earnings release that would prompt a change in Moody's outlook
or rating, he said.

Textron's financial profile is weak for its rating, but
Moody's has kept it at investment grade because the agency
expects improvement over time, he said.

Textron's bonds were little changed after its results,
though its convertible bonds due in 2013 rose to 169 cents on
the dollar, up about 5 cents on the day.

The cost of protecting Textron Financial's five-year credit
default swaps fell to 204 basis points from 230 basis points at
Monday's close, according to Markit Intraday.

Textron, which makes Cessna business jets, Bell helicopters
and EZ-Go golf carts, posted third-quarter earnings of $4
million, down from $206 million a year earlier but up from a
$58 million loss in the second quarter. For details click on
[ID:nN27185327].

Textron sparked concerns this year after drawing down its
bank lines, but the company has restored investor confidence by
bolstering liquidity and refinancing bonds to give itself more
time to pay them off. Textron Financial has also been winding
down its noncaptive business, such as loans for golf course
developers, to focus on financing equipment made by its own
manufacturing arms.

"The company has remarkably downsized its finance business
portfolio so far and that will continue in the next year," said
Hitin Anand, analyst for independent research service
CreditSights. Anand is keeping an overweight on Textron, even
after the rally its bonds have enjoyed in recent months.

"While the finance segment right-sizes itself to eventually
become a pure captive financing arm at the other end of the
cycle, it still has the support of a solid industrial parent,"
he said. Free cash flow at the parent is improving solidly,
thanks to a run-off of inventory and better management of
working capital, he said.

Textron still has challenges, however, Gimme Credit analyst
Carol Levenson said in a research note on Tuesday.

While Textron Financial has been liquidating assets at a
healthy clip, problems in the remaining portfolio worsened, as
nonaccruals, or loans with overdue interest, rose, Levenson
said.

Losses and delinquencies are expected to increase, Moody's
Jankowitz said. Many of the loans remaining in Textron
Financial's portfolio are longer-term loans for golf courses or
time-share units and are expected to remain outstanding for
some time, he said.

Moody's had lowered Textron's rating in April, citing
higher-than-expected charge-offs in the financial arm's
portfolio and a worsening environment for business jets.

While Textron's Cessna is a good company, it will likely be
troubled for a while because the business jet industry is going
through a severe cyclical downturn, Jankowitz said. An upturn
in orders for business jets is unlikely until 2011 or perhaps
2012, he said.
(Editing by James Dalgleish)