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Earnings ESP

4 Defense Stocks Set to Top Earnings Estimates
 
Investors are now eyeing the aerospace and defense industry with renewed interest after President Barack Obama signed into law the National Defense Authorization Act for fiscal year 2014. In fact, stocks in the aerospace and defense industry look pretty good ahead of the fourth quarter results.

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, 2013, 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. The companies that have little diversification outside the U.S. are highly susceptible to spending cuts from sequestration. On the other hand, those with an international order book would find it less difficult to outwit sequestration.

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.

Picking the Right Stocks?

Picking the right stock for your portfolio could appear to be a daunting task given the 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 (Estimated Surprise Prediction).

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 Zacks Consensus Estimate.

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 a positive earnings surprise is as high as 70%.

Here are four aerospace and defense stocks that are scheduled to release earnings recently and match these criteria.
 
Embraer SA (ERJ - Analyst Report)
 
This Brazilian plane maker is the world's third largest commercial aircraft manufacturer on the heels of The Boeing Co. (BA) and Europe's Airbus.         
 
Recently, the company announced that it met its delivery targets for its commercial and executive segments in 2013 following a surge in sales volume. With rising demand for regional aircraft, Embraer’s firm order backlog totaled $18.2 billion at the end of the fourth quarter, reflecting an increase of 2.2% from the last reported quarter.
 
Importantly, during the fourth quarter, Embraer won a contract from American Airlines Group Inc. worth $2.5 billion at list prices. Per the agreement, Embraer will deliver 60 E175 planes with an option to deliver an additional 90 aircraft. We believe this significant deal, along with a series of contracts and tie-ups with several companies for its jets, will eventually boost the performance of Embraer’s commercial aircraft division.
 
Embraer has a Zacks Rank #2 (Buy) and has an Earnings ESP +5.16%. The company is expected to report its fourth quarter 2013 results on Mar 11.
 
TransDigm Group Incorporated (TDG - Analyst Report)
 
Based in Cleveland, Ohio, TransDigm Group has recently been pursuing strategic acquisitions to consolidate its presence in the aerospace industry. All the acquisitions that the company has been making have been accretive to earnings and revenues.
 
Recently, the company completed the acquisition of Airborne Systems Inc. from Metalmark Capital, in an all-cash deal valued at approximately $250 million. Through this acquisition, TransDigm will be able to leverage Airborne’s proprietary personnel parachutes, cargo aerial delivery systems, emergency escape systems, naval decoys and other related products. This bodes well for TransDigm’s growth prospects.
 
This Zacks Rank #1 (Strong Buy) stock still has enough fundamentals to drive the stock upward. It has an Earnings ESP +6.25% and is expected to report its next earnings on Feb 3.

Northrop Grumman Corp. (NOC)
 
Falls Church, Va.-based Northrop Grumman supplies a broad array of products and services to the Department of Defense, 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 $23.4 billion, the introduction of new products, and the commitment to return wealth to its shareholders make this Zacks Rank #2 (Buy) stock attractive. Northrop also has an Earnings ESP +5.16%. The company is scheduled to report its fourth quarter 2013 results before the market opens on Jan 30.
 
Huntington Ingalls Industries, Inc. (HII - Snapshot Report)
 
The largest military shipbuilder in the U.S., Huntington Ingalls is the prime industrial employer in Virginia. Huntington Ingalls, originally an affiliate of Northrop Grumman, was spun off in Mar 2011. It operates major shipyards in Louisiana, Mississippi and Virginia.
 
Despite the budget austerity, we believe Huntington Ingalls will remain well-positioned backed by its effective execution skills and diverse product offerings. Recently, Huntington Ingalls announced its takeover of The S.M. Stoller Corporation – the consulting and engineering services provider to the federal government and private sector.
 
 
The company currently has a Zacks Rank #3 along with an Earning ESP of +4.10%. The company is expected to report its fourth quarter 2013 results on Feb 26.
 
Bottom Line
 
In spite of the unstable political scenario and federal 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, commonly referred to as foreign military sales, to keep their top line rolling.
 
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 their earnings numbers.

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