Can Northrop (NOC) Pull A Surprise This Earnings Season?

Defense major Northrop Grumman Corporation (NYSE:NOC) is scheduled to release third-quarter 2016 results on Oct 26, before the opening bell.

In the prior quarter, the company reported a positive earnings surprise of 4.00%. Notably, Northrop has outperformed the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 8.69%.

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

Factors at Play

Northrop has a strong presence in the U.S. Air Force, Space and Cyber Security programs; with a well-positioned product line for high-priority categories like defense electronics, unmanned aircraft and missile defense.

Meanwhile, management expects Northrop to gain tax benefit in third-quarter 2016 on account of an approval from the Congressional Joint Committee on Taxation for the resolution of the IRS examination of its 2007 to 2011 tax returns.

Particularly, this tax gain is expected to reduce Northrop’s third-quarter income tax expenses by approximately $40 million and consequently lower its 2016 projected effective tax rate to approximately 25.5%, apart from adding 20 cents to the full-year EPS figure.

It is based on this tax benefit that Northrop raised its 2016 EPS guidance to a range of $10.75–$11 from the prior $10.40–$10.70.

The company also secured a handful of contracts from the Pentagon, reflecting its popularity as a major defense contractor.Among the varied deals received during the third quarter, the notable ones include the $375.6 million Navy contract for the procurement of 9 Ground/Air Task-Oriented Radar (G/ATOR) low-rate initial production systems and the $255.3 million deal for low-rate initial production (LRIP) of MQ-4C Triton unmanned aircraft.

On the flip side, the company had announced plans of finalizing its 2016 pension demographic study in the third quarter. The study results might impact Northrop’s net FAS/CAS pension adjustment for 2016.

For the third quarter, the Zacks Consensus Estimate for earnings is $2.50 a share, reflecting a surge of 16.76% year over year, while the consensus mark for revenues is pegged at $5.98 billion, implying 0.03% year-over-year growth.

Earnings Whispers

Our proven model does not conclusively show that Northrop is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Northrop has an earnings ESP of +0.00%. That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $2.81.

Zacks Rank: Northrop has a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, a 0.00 % ESP makes surprise prediction difficult.

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

Stocks to Consider

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:

L-3 Communications Holdings Inc. (NYSE:LLL) has an earnings ESP of +2.75% and a Zacks Rank #3. The company is scheduled to report quarterly results on Oct 27.

General Dynamics Corporation (NYSE:GD) , slated to report on Oct 26, has an earnings ESP of +0.84% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Boeing Company (NYSE:BA) has an earnings ESP of +0.38% and a Zacks Rank #3. The company is slated to release results on Oct 26.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>