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Is Northrop Grumman (NOC) Poised for a Q1 Earnings Beat?

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Defense giant Northrop Grumman Corporation (NOC - Free Report) is scheduled to release first-quarter 2017 results on Apr 26, before the opening bell. The company’s product line is well positioned in high-priority categories, such as defense electronics, unmanned aircraft and missile defense.

In the prior quarter, the company reported a positive earnings surprise of 6.83%. It is worth noting that Northrop Grumman has outperformed the Zacks Consensus Estimate in all the trailing four quarters, the average positive surprise being 7.61%.

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

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.

Zacks ESP: Northrop Grumman has an Earnings ESP of +0.35%. This is because the Most Accurate estimate stands at $2.90, higher than the Zacks Consensus Estimate of $2.89. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Northrop Grumman carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings estimates.

Notably, we caution against stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Meanwhile, Northrop Grumman’s combination of a Zacks Rank #2 and +0.35% ESP makes us reasonably certain of an earnings beat.

What’s Driving the Better-Than Expected Earnings?

Being one of the largest U.S. defense contractors, Northrop Grumman enjoys a strong presence in the U.S. Air Force, Space and Cyber Security programs. Per management, the company kick-started 2017 with a favorable position to increase sales and generate strong cash flows.

Northrop Grumman follows a stable capital deployment strategy that allows it to invest in the business, manage the balance sheet and return cash to shareholders through share repurchases as well as dividends. In line with this strategy, management expects the company to continue with higher levels of capital investment by expanding its workforce, introducing large new programs, completing expenditures related to its centers of excellence and pursuing attractive new business opportunities. We believe the upcoming results will reflect this policy.

With respect to tax structure, Northrop Grumman’s 2017 guidance includes an estimated first quarter tax benefit, owing to the accounting policy—ASU 2006-09, that it adopted last year.

Moreover, the company has identified a growing list of domestic and international opportunities across its businesses, which comprises the Ground Based Strategic Deterrent program, Triton for Australia, SABR Radar for the US Air Force and several international customers. It also includes significant restricted opportunities, and additional international programs being pursued by mission systems and Technology Services in Australia and in the Middle East.  Further updates on these opportunities can be expected once Northrop Grumman reports its first quarter results.

Besides, important contracts won by Northrop Grumman in the first quarter include the $812 million Navy deal for the production of Littoral Combat Ship (LCS) gun mission modules and the $140 million modification contract for Battle Field Airborne Communication Node (BACN) payload, operations and support. Such contracts will surely boost the revenue growth trajectory of the company.

On the flip side, the company earlier announced its projection of lower sales from Technology Services unit due to expected decline in the KC-10 program revenues. We may expect the first quarter results to reflect a portion of this decline.

For the first quarter, the Zacks Consensus Estimate for earnings is pegged at $2.89 per share, up 4.17% year over year, while the revenue estimate is at $6.12 billion, implying a 2.69% year-over-year improvement.

Other Stocks that Warrant a Look

Here are some other companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Leidos Holdings, Inc. (LDOS - Free Report) is expected to report first-quarter 2017 results on May 4. The company has an Earnings ESP of +1.28% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lockheed Martin Corp. (LMT - Free Report) is expected to report first-quarter 2017 results on Apr 25. The company has an Earnings ESP of +1.83% and a Zacks Rank #2.

General Dynamics Corp. (GD - Free Report) is expected to report first-quarter 2017 results on Apr 26. The company has an Earnings ESP of +0.43% and a Zacks Rank #3.

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