3 Defense Stocks Set to Top Earnings Estimates - Earnings ESP

By Zacks Equity Research,

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Investors are now eyeing the aerospace and defense industry with renewed interest after the U.S. Senate reached an agreement to end the 16-day government shutdown and temporarily raised the federal debt ceiling.

Keeping in mind technological progress, acquisition benefits,   and cost-cutting efforts of individual companies, we have an overall bullish outlook for the sector. However, sequestration, which came into effect from Mar 1, still remains an overhang both in the civil and military businesses.

The defense companies have however figured out the strategies to stimulate growth and counter the ill effects of sequestration and budget austerities. In fact, defense players seem to be doing well despite the cuts in defense budgets and big-ticket programs.

Given the positive sentiment, it might be a good idea to bet on a handful of aerospace and defense stocks that are poised to beat earnings estimates this quarter.

How to Make a Choice?

Picking the right stock for your portfolio could appear to be a daunting task amid a wide range of companies in the aerospace and defense space. One way to confine the list of choices during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Zacks Earnings ESP .

Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Consensus.

The combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Earnings ESP is usually an indication of an earnings beat. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.

Here are three aerospace and defense stocks that are scheduled to release earnings next week and match these criteria:

Lockheed Martin Corp. ( LMT )

Lockheed Martin is the world's largest stand-alone defense contractor, whose 82% of sales come from the U.S. government. Supported by multiple strengths like growth in earnings per share and notable return on equity, the company presently carries a Zacks Rank #2 (Buy) and has an Earning ESP of +2.21%. Lockheed Martin is set to report its third quarter results on Oct 22, before the opening bell.

Loaded with contracts, Lockheed Martin is building three models of the very expensive and controversial F-35 for the U.S. military and eight international partner countries including Britain, Australia, Canada, Norway, Turkey, Italy, Denmark and the Netherlands. Israel and Japan have also ordered the fighter jet. Lockheed Martin's F-35 program accounts for approximately 15% of the company's total revenues. The sales contribution from the F-35 is expected to go up in the coming years.

Northrop Grumman Corp. ( NOC )

Falls Church, Va.-based Northrop Grumman supplies a broad array of products and services to the Department of Defense (DoD), including electronic systems, information technology, aircraft, space technology, and systems integration services.

A steady flow of contracts, which also include substantial international orders, a funded backlog of $23.2 billion, the introduction of new products, and the tendency of returning wealth to its shareholders make this Zacks Rank #2 (Buy) stock attractive. Northrop also has an Earnings ESP +2.21%. The company is expected to report its third quarter 2013 results before the market opens on Oct 23.

General Dynamics Corp. ( GD )

Based in Falls Church, Virginia, General Dynamics Corp. engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. Jet sales at the Gulfstream business are continuing to see traction even in the slowing defense sales scenario.

Despite the budget austerity, we believe General Dynamics will remain well-positioned backed by its effective execution skills and diverse product offerings. The company currently has a Zacks Rank #3 along with an Earning ESP of +1.80%. The company is expected to report its third quarter 2013 results before the opening bell on Oct 23.

Bottom Line

In spite of the unstable political scenario and budget cuts, the defense pros, much to their relief, have been awarded a steady stream of contracts from the Pentagon. These companies are also in the lookout for more international contracts, or FMS, to keep their top line intact.

So, the question no longer is whether or not to choose defense stocks. But the critical question is to choose the right defense stocks before they release earnings.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

GENL DYNAMICS (GD): Free Stock Analysis Report

LOCKHEED MARTIN (LMT): Free Stock Analysis Report

NORTHROP GRUMMN (NOC): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Earnings
Referenced Stocks: GD , LMT , NOC

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