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General Dynamics (GD) Q4 Earnings: A Beat in the Cards?

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Defense behemoth General Dynamics Corporation (GD - Free Report) is scheduled to release fourth-quarter and full-year 2016 results on Jan 27, before the opening bell.

In the prior quarter, the company reported a positive earnings surprise of 4.64%. Notably, General Dynamics has outperformed the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 5.55%.

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

Why a Likely Positive Surprise?

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

Zacks ESP: General Dynamics has an Earnings ESP of +1.18%. That is because while the Most Accurate estimate is pegged at $2.57, the Zacks Consensus Estimate is lower at $2.54. 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: General Dynamics currently carries a Zacks Rank #3 (Hold).

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 #3 and positive ESP make us reasonably confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

Being one of the only two contractors in the world equipped to build nuclear-powered submarines, General Dynamics derives its profits from a broad portfolio of products and services. The company stands to gain from its engagement in R&D activities that facilitate the introduction of new products and bring about first-to-market enhancements.

Among the notable highlights of the fourth quarter, General Dynamics clinched a modification contract from the U.S. Navy, worth $147 million, to increase the design support requirements of a previously awarded contract for Columbia-class nuclear submarine. The company also gained a deal worth $126 million from the U.S. Coast Guard to offer program management and system support for Rescue 21, the Coast Guard's advanced command, control and direction-finding communications system and another Navy contract worth $106 million for procuring additional long lead time material, engineering and non-production support for the Expeditionary Mobile Base 5 (ESB 5).

Also, General Dynamics witnessed strong order growth in the third quarter, which management expects to observe in the fourth quarter as well.

Segment-wise, the company expects revenues from its Combat Systems business to grow 30% in the yet-to-be-reported quarter. Robust backlog and strong order growth are expected to primarily lend support to revenues.

Moreover, the company anticipates stronger-than-expected operating results in the fourth quarter, a lower than planned tax rate and modestly lower share count, which have encouraged management to raise the 2016 EPS guidance from $9.70 to $9.75.

Overall, for the fourth quarter, the Zacks Consensus Estimate for earnings stands at $2.54 a share, reflecting an increase of 5.79% year over year, while the consensus mark for revenues is pegged at $8.26 billion, implying a 5.75% year-over-year decline.

Price Movement

General Dynamics gained about 17.3% in the last three months, outperforming the Zacks categorized Aerospace-Defense industry’s gain of 8.7%. This is probably because of the company’s strong focus on research and development, diverse customer base and an attractive product mix, which in turn will help it maintain steady growth momentum.

Stocks that Warrant a Look

Here are a few 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 - Free Report) 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 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Raytheon Company 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. 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.

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