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Northrop Grumman (NOC) Q4 Earnings: A Beat in the Cards?

Defense giant Northrop Grumman CorporationNOC is scheduled to release fourth-quarter and full-year 2016 results on Jan 26, before the opening bell.

In the prior quarter, the company reported a positive earnings surprise of 7.47%. Notably, Northrop Grumman outperformed the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 8.29%.

Let's see how things are shaping up at the company prior to the announcement.

Why a Likely Positive Surprise?

Our proven model shows that Northrop Grumman is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP: Northrop Grumman has an Earnings ESP of +0.80%. That is because while the Most Accurate estimate is pegged at $2.51, the Zacks Consensus Estimate is lower at $2.49. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Northrop Grumman currently carries a Zacks Rank #2 (Buy).

Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. Conversely, Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

The company's Zacks Rank #2 and positive ESP make us reasonably confident of an earnings beat.

Northrop Grumman Corp. Price and EPS Surprise

Northrop Grumman Corp. Price and EPS Surprise | Northrop Grumman Corp. Quote

What is Driving the Better-than-Expected Earnings?

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

For profit maximization, the company enjoys a rich opportunity set that includes programs like the T-X trainer, Joint STARS recapitalization, Ground-Based Strategic Deterrent, SABR radar, GPS III, MQ-25 and a number of other international opportunities.

In Jul 2016, management at Northrop Grumman resolved the IRS examination of its 2007- 2011 tax returns. As a result, its third-quarter 2016 income tax expenses were reduced by $42 million and a similar reduction can be expected in the yet-to-be-reported quarter as well. In terms of cash flow, management expects to witness a strong performance.

With respect to guidance, the company raised its 2016 revenue expectations to the range of $23.9-$24.1 billion, from the previous $23.5-$24.0 billion. Northrop Grumman also raised its guidance for diluted earnings per share to the band of $11.55-$11.75 from the prior projection of $10.75-$11.00.

On the flip side, the company has been operating under a continuing resolution (CR) during the fourth quarter, which was supposed to expire on Dec 9, 2016. Management fears that a prolonged CR might constrain Northrop Grumman's customer ability to achieve planned program ramp-ups and to start new programs.

For the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at $2.49 a share, reflecting an increase of 14% year over year, while the consensus for revenues is $5.91 billion, implying a 3.82% year-over-year rise.

Price Movement

Northrop Grumman gained about 7.2% in the last three months, below the Zacks categorized Aerospace- Defense industry's rise of 14.4%. This is probably because of the challenging economic and political factors that have been hampering its growth trajectory as well as weak sales growth in the past few quarters.

Other Stocks that Warrant a Look

Here are a few other stocks in the Aerospace and Defense space worth considering on the basis of our model which shows that they have the right combination to pull off a beat:

Huntington Ingalls Industries, Inc. HII is expected to report fourth-quarter 2016 results on Feb 16. The company has an Earnings ESP of +2.82% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Raytheon Company RTN is slated to release fourth-quarter 2016 results on Jan 26. The company has an Earnings ESP of +2.15% and a Zacks Rank #3.

L3 Technologies, Inc. LLL is scheduled to report fourth-quarter 2016 results on Jan 26. The company has an Earnings ESP of +2.36% and a Zacks Rank #3 (Hold).

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Northrop Grumman Corp. (NOC): Free Stock Analysis Report

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


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

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