Will L-3 Communications (LLL) Surprise This Quarter? - Analyst Blog

L-3 Communications Holdings Inc. LLL is set to report its first quarter 2014 results on May 1 before the opening bell. Last quarter, this defense major reported an impressive 9.6% positive earnings surprise, while the four-quarter trailing average beat is 4.75%. Let's see how things are shaping up for this announcement.

Factors to Consider

L-3 Communications reported better-than-expected fourth quarter 2013 numbers. International and commercial businesses drove the uptrend, partially offset by a weak U.S. national security business.

In fact, the company posted a steady performance through 2013 based on its program execution capability, cost cutting initiatives and contribution from international and commercial businesses.

Even in the first quarter of 2014, the company's deep and diversified portfolio of product offerings enabled it to win defense contracts at regular intervals. The company is also proactive in making wise shareholder-friendly moves. In 2013, the company returned $1 billion to shareholders through stock purchases and dividend payments. It expects to make $1 billion of free cash flow and buy back $0.5 billion of shares in 2014.

Recently, L-3 Communications boosted the quarterly cash dividend by 9% from 55 cents to 60 cents per share. This further instills confidence in the stock as dividend hikes reflect a company's sound financial position and healthy cash flow position.

L-3 Communications' constant efforts to upgrade technology will strengthen its profitable business segments like Electronic Systems and Platform & Logistics Solutions. The company's recent acquisition of Data Tactics Corporation will help it to benefit from the Big Data Analytic revolution. The Department of Defense (DoD) is increasingly focusing on network-centric warfare which involves the collection of data from various sources as well as the seamless to and fro movement of confidential information.  Data Tactics is a provider of Big Data analytics and cloud computing solution services, primarily to the U.S. DoD.

That being said, the sequestration will to some extent dry up orders for all defense biggies. Budget austerities still remain an overhang on the military sector. The companies that have little diversification outside the U.S. are highly susceptible to spending cuts from sequestration. On the other hand, those with an international order book would find it less difficult to outwit sequestration.

Earnings Whispers?

Our proven model does not conclusively show that L-3 Communications is likely to beat earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 to surpass earnings estimate. However, that is not the case here due to the following factors.

Zacks ESP: The Most Accurate estimate of $1.96 per share is at par with the Zacks Consensus Estimate. Hence, the Earnings ESP, which is the difference between the aforementioned estimates, is 0.00%.

Zacks Rank #2 (Buy): L-3 Communications has a Zacks Rank #2 (Buy). Note that stocks with Zacks Rank #1, 2 and 3 have significantly higher chances of beating earnings. Conversely, Sell-rated stocks (#4 and 5) are never considered going into the earnings announcement.

The combination of L-3 Communications' Zacks Rank #2 and 0.00% ESP makes surprise prediction difficult.

Other Stocks to Consider

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

Wesco Aircraft Holdings, Inc. WAIR has an earnings ESP of +3.03% and a Zacks Rank #3 (Hold). Wesco Aircraft will report first quarter earnings on May 6.

TASER International Inc.'s TASR Zacks Rank #2 (Buy) and +25.00% ESP makes us confident of a possible earnings beat on Apr 30, 2014.

Peer Release

Pentagon's prime contractor Lockheed Martin Corp. LMT cheered the market posting impressive first quarter earnings amid an uncertain environment riddled by sequestration. It reported earnings of $2.87 per share, comfortably surpassing the Zacks Consensus Estimate of $2.52 by 13.9%. The stock currently holds a Zacks Rank #2 (Buy).