Defense contractor Northrop Grumman Corp. (NOC) is slated to report its third-quarter 2014 results on Oct 22, 2014 before the opening bell. Last quarter, the company posted a negative earnings surprise of 7.27%. Let us see what is in store this quarter.
Why a Likely Positive Surprise?
Our proven model shows that Northrop is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.46%. This is a meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Northrop has a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Northrop’s Zacks Rank #3 and +0.46% ESP makes us confident of an earnings beat.
What is Driving the Better-than-Expected Earnings?
The company has a strong presence in Air Force, Space & Cyber Security programs. Northrop’s product line is well positioned in high-priority categories, such as, defense electronics, unmanned aircraft and missile defense.
Bolstered by a solid first-half 2014 performance and a modestly better segment margins outlook, Northrop raised its earnings guidance for the year to a band of $9.15–$9.35 per share from the earlier $8.90–$9.15 per share, with international sales expected to reach 13% of total sales, up from 10% in 2013. The growth will likely come from unmanned aerial vehicles and cybersecurity work.
Northrop Grumman is effectively battling the current sequestration wave thanks to its diversified business mix and strategic acquisitions. With rising security tensions in the Middle East as well as regional tensions in the Far East, foreign military sales could prove to be the key performance catalyst for Northrop.
The company won numerous contracts during the three-month period of Jul-Sep 2014. Northrop − the maker of the U.S. military's Global Hawk drone – received a $354 million contract in Sep 2014 from the U.S. Air Force to expand its RQ-4 Global Hawk unmanned aircraft system fleet by three aircraft and bring in additional multi-intelligence capability.
The big defense spenders across the globe are trying to curtail their defense budgets, which could impact the future prospects of large defense companies. However, Northrop’s capability to win contracts at regular intervals allowed it to post strong performances. Northrop surpassed the Zacks Consensus Estimate in three of the last four quarters with an average beat of 3.03%.
As far as the current performance is concerned, it is likely that Northrop will be able to beat estimates in the third quarter. The long-term earnings growth rate is pegged at 7.7%. The Zacks Consensus Estimate for 2014 of $9.39 per share reflects year-over-year growth of 19.1%.
Other Stocks to Consider
Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
General Dynamics Corp. (GD) has an earnings ESP of +0.52% and holds a Zacks Rank #2.
Curtiss-Wright Corporation (CW) has an earnings ESP of +2.3% and sports a Zacks Rank #1.
Rockwell Collins Inc. (COL) has an earnings ESP of +2.38% and holds a Zacks Rank #3.
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