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Will Northrop (NOC) Pull Off a Surprise with Q1 Earnings?

Defense major Northrop Grumman Corp. NOC is set to release first-quarter 2016 results before the opening bell on Apr 27. In the preceding quarter, the company delivered a positive earnings surprise of 9.55%. Let’s see how things are shaping up for this announcement.

Factors at Play

Northrop Grumman has a strong presence in the U.S. Air Force, Space and Cyber Security programs. Northrop’s product line is well positioned in high-priority categories, such as, defense electronics, unmanned aircraft and missile defense.

During the fourth-quarter earnings call, the company did not give first-quarter estimates. However, it guided that 2016 will be another year of strong operating performance.

The company will initiate work on some major new development programs, as it transitions from a number of legacy production programs in aerospace and electronic systems to new production programs, in aerospace emission systems.

Importantly, the proposed fiscal 2017 budget will also seek to enhance spending in several key areas, including cybersecurity, electronic warfare and increased security for crucial U.S. satellites. With the win of the Long-Range Strike Bomber contract, its revenue outlook should improve considerably over the coming years, leading to a multiple expansion opportunity.

For 2016, the company expects sales of $23.5 billion to $24 billion with low single-digit growth in Aerospace. Earnings per share are expected in the range of $9.90 to $10.20 and free cash flow is projected at $1.5 billion to $1.8 billion after capital expenditures of $700 million to $1 billion.

Earnings Whispers

Our proven model does not conclusively show that Northrop Grumman will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Ranks #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP for Northrop Grumman is -0.41% as the Most Accurate estimate is currently at $2.46 while the Zacks Consensus Estimate is pegged at $2.47.

Zacks Rank: Though Northrop Grumman currently carries a Zacks Rank #3, a negative ESP makes a beat difficult to predict.

Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. Conversely, Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.

A Stock that Warrants a Look

Unlike Northrop Grumman, we see a likely earnings beat coming from its industry peer Spirit AeroSystems Holdings, Inc. SPR which has an earnings ESP of +6.6% and a Zacks Rank #2. The company is scheduled to report first-quarter 2016 results on Apr 29.

Other Upcoming Defense Releases

General Dynamics Corp. GD is expected to report first-quarter 2016 earnings on Apr 27, 2016.

Raytheon Co. RTN will report first-quarter 2016 earnings on Apr 28, 2016.

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NORTHROP GRUMMN (NOC): Free Stock Analysis Report
GENL DYNAMICS (GD): Free Stock Analysis Report
SPIRIT AEROSYS (SPR): Free Stock Analysis Report
RAYTHEON CO (RTN): Free Stock Analysis Report
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