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We expect Northrop Grumman Corp. (NOC - Analyst Report) to beat expectations when it reports first quarter 2013 results on Apr 24.

Why a Likely Positive Surprise?

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

Positive Zacks ESP: Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at +1.16%. This is a leading indicator of a likely positive earnings surprise for shares.

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

The combination of Northrop Grumman’s Zacks Rank #3 (Hold) and +1.16% ESP makes us confident of a positive earnings beat on Apr 24.

What is Driving Better-than-Expected Earnings?

Despite defense spending cuts, there seems to be a number of opportunities for the company. Northrop Grumman’s product line is well positioned in high priority categories, such as defense electronics, unmanned aircraft and missile defense. Revenue and earnings growth continue to be driven by its strong presence in the current focus areas of cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance systems, advanced electronics and software development.

With the successful spin-off of its shipbuilding business, in Mar 2011, Northrop Grumman’s revenue base is heavily skewed towards programs with a short business cycle. The spin-off has fetched $1.4 billion for the company.

Moreover, Northrop Grumman’s strong order backlog, impressive balance sheet and cash flows provide substantial financial flexibility. An incremental dividend, ongoing share repurchases and earnings accretive acquisitions provide bottom-line support to the stock.

In particular, the company’s diversified nature of business makes it one of the better positioned pure defense players. Also, we see a positive trend in the trailing four-quarter average surprise of 12.39%, which was mainly driven by the 18.39% positive surprise in the fourth quarter 2012.

Other Stocks to Consider

Northrop Grumman is not the only firm looking up this earnings season. We also see likely earnings beats coming from these three industry peers:

Lockheed Martin Corporation (LMT - Analyst Report) has an earnings ESP of +3.48% and carries a Zacks Rank #3 (Hold).

Alliant Techsystems Inc. (ATK - Analyst Report) has an earnings ESP of +11.40% and carries a Zacks Rank #3 (Hold).

Raytheon Company (RTN - Analyst Report) has an earnings ESP of +2.34% and carries a Zacks Rank #3 (Hold).

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