NOC Northrop Grumman Corp Holding Co

We expect aerospace and defense company Raytheon Company (RTN) to beat expectations when it reports second-quarter 2013 results on Jul 25, 2013.

Why a Likely Positive Surprise?

Our proven model shows that Raytheon is likely to beat earnings because it has the right combination of key factors.

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 +1.54%. This is meaningful and a leading indicator of a likely positive earnings surprise for this company.

Zacks #3 Rank (Hold): We 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 Raytheon’s Zacks Rank #3 (Hold) and +1.54% ESP make us confident of a positive earnings beat on Jul 25.

What is Driving the Better than Expected Earnings?

We view Raytheon as one of the well-positioned companies among the large-cap defense players due to its non-platform-centric focus. This factor shields the company from program specific risks related to cancellation or deferral of any specific program.

Raytheon is flooded with a number of contracts from several national as well as international government establishments. On Jul 8 2013, the company was awarded a cost-plus-incentive-fee contract, worth $279.4 million, by the U.S. Department of Defense (DoD) to develop a new electronic jammer for the U.S. Navy.

Apart from domestic contracts, Raytheon is progressing well on foreign military sales opportunities, including the Kuwait Patriot, the Oman ground-based air defense system, radars and missiles. We believe international sales continue to be a key source of future revenue generation for the company.

The positive trend is seen in the trailing four quarter average surprise of 19.90%. The company’s first-quarter 2013 surprise was 21.87%. Benefits from an effective cash deployment strategy and operational improvements aided the surprise.

Other Stocks to Consider

Raytheon is not the only organization looking up this earnings season. We also see other aerospace and defense players to beat earnings.

The Boeing Company (BA), Earnings ESP of +1.27% and Zacks Rank #2 (Buy).

General Dynamics Corporation (GD), Earnings ESP of +0.61% and Zacks Rank #3 (Hold).

Northrop Grumman Corporation (NOC), Earnings ESP of + 0.59% and Zacks Rank #3 (Hold).

 
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