Defense Stocks to Post Q3 Earnings on Oct 26: RTN & LLL

The Q3 earnings season has begun on an optimistic note, with 87 S&P 500 participants (24.7% of the total market cap) reporting encouraging numbers as of Oct 20.

Per our latest Earnings Preview, total earnings for these members rose 9.4% on 7.3% higher revenues. The earnings beat ratio for these members was 71.3%, while that for top line was 70.1%.

Coming to the Aerospace-Defense industry, Lockheed Martin Corporation LMT released its quarterly result on Oct 24, wherein the company's earnings were lower than what most analysts had expected. Nevertheless, with several other defense behemoths set to report third-quarter numbers this week and considering the favorable budget trend prevailing in this industry, we may expect the industry’s earnings scenario to improve.

Notably, projections for the Aerospace sector (one of the 16 Zacks sectors), which constitutes the Aerospace-Defense industry, hint at a mixed quarter, when compared to the overall Q3 forecast for the S&P 500 cohort. The Sector’s earnings are likely to decline 12.9% on 5.3% higher revenues; while earnings for S&P 500 members are likely to rise 2.6% on 5% higher revenues, as of Oct 20.

Interestingly, defense stocks in the third quarter reached new-all-time highs for multiple times, courtesy of the varied supportive defense policy initiatives adopted by President Trump. In particular, the favorable budgetary amendments made by the U.S. government, like the passing of the fiscal 2018 defense policy bill worth $700 million, have boosted the growth prospects of defense stocks. A steady flow of contracts from Pentagon to ‘rebuild’ the U.S. Army also provided an impetus to the stocks. With Trump strongly opposing the budget sequestration imposed by his predecessor, defense stocks are surely to gain traction in the near term.

With 180 S&P 500 members lined up for  their quarterly results release this week, let’s take a look at two defense majors — Raytheon Company RTN and L3 Technologies, Inc. LLL —  both of which are scheduled to release quarterly results before the opening bell on Oct 26.

Raytheon’s Missile Systems segment is a major growth driver. The third quarter is also poised to benefit from this unit, on the back of contract wins for its product line. Notably, the Zacks Consensus Estimate for third-quarter sales is $1,980 million for the segment, reflecting year-over-year growth of 13.2%.

Apart from its strong forte in the domestic front, international business expansion has also been another significant growth driver for Raytheon. The company is currently witnessing strong demand for varied product line not only from the Middle East but also from Asia Pacific. We believe once the company reports third-quarter results, these nations’ contribution to Raytheon’s growth story will become clearer.

Moreover, during second-quarter earnings call, Raytheon’s management raised its EPS guidance to reflect the company’s improved operating performance alongside expecting the bottom line to grow in the third quarter. In line with this our consensus estimate for Raytheon’s earnings is pegged at $1.90 per share, reflecting annual growth of 6.4%.

Our proven model shows that Raytheon is likely to beat earnings this quarter. Notably, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Raytheon has the right combination of a favorable Zacks Rank and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Raytheon currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. The company has an Earnings ESP of +0.05% because the Most Accurate estimate is pegged at $1.91, while the Zacks Consensus Estimate is $1.90 (read more: Can Missile Systems Unit Drive Raytheon's Q3 Earnings?).

Raytheon Company Price and EPS Surprise

 

Raytheon Company Price and EPS Surprise | Raytheon Company Quote

L3 Technologies expects sales of roughly $2.7 billion in the to-be-reported quarter, which reflects about 6% organic growth. While operating margin is anticipated to lie in the mid-9% range, earnings per share is projected to be between $1.85 and $1.95.

However, the company expects Aerospace Systems segment to decline in the third quarter compared with the first half of 2017. This is primarily due to certain contract price modifications at Vertex sliding into the fourth quarter of 2016, and sales mix in Intelligence, Surveillance & Reconnaissance as well as aircraft systems.

Moreover, our proven model does not conclusively shows that L3 Technologies is likely to beat earnings this quarter. This is becausethe company currently carries a Zacks Rank #4 (Sell) and has an Earnings ESP of 0.00%. Both of its Most Accurate estimate as well as the Zacks Consensus Estimate are pegged at $1.94 (read more: L3 Technologies Q3 Earnings: What's in the Cards?).

L-3 Technologies, Inc. Price and EPS Surprise

 

L-3 Technologies, Inc. Price and EPS Surprise | L-3 Technologies, Inc. Quote

Stay tuned! Check later for our full write-up on earnings releases of these stocks.

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Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
 
Raytheon Company (RTN) : Free Stock Analysis Report
 
L-3 Communications Holdings, Inc. (LLL) : Free Stock Analysis Report
 
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