Rockwell Collins Inc. (COL) announced that it would release its first quarter fiscal 2013 earnings results ending Dec 31, 2012, before the market opens on Jan 18, 2012. Last quarter, it posted a +21.1% surprise. Let’s see how things are shaping up prior to the announcement.
Factors to Consider this Quarter
Rockwell Collins is the foremost global supplier of communications and avionics equipment for both commercial and military customers. Its balanced exposure to both types of customers allows the company to use government funding to develop products for the dual-end market. The dual-end market leads to higher volume sales, which create economies of scale in cost-sensitive government contracts.
However, currently the U.S. defense spending is negatively impacted by the Budget Control Act of 2011. The first part dictates a $487.0 billion reduction to previously-planned defense spending over the next decade. The second part is a sequester mechanism that would impose an additional $500.0 billion of cuts on defense spending, if the Congress is not able to reduce the U.S. deficit by $1.2 trillion.
In order to stem the rot in the massive U.S. debt, President Obama and Congress are struggling to cut more than a trillion dollars in government spending. However till date the Congress has not passed the 2013 defense department budget proposed last year by the Pentagon. Instead it has approved a level of spending comparable with fiscal 2012.
The pessimistic mood is also shared by the Rockwell Collins management who are expecting around 10% fall in the top line of its Government Systems business in the ongoing fiscal. Management expects the downslide would only be partially offset by a 7% top-line upside in its Commercial Systems business. The upside would stem from a steady recovery in the business and regional jet markets.
As a result, our proven model does not conclusively show that Rockwell Collins is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: This is because the Most Accurate estimate stands at 88 cents while the Zacks Consensus Estimate is higher at 90 cents. That is a difference of -2.2%.
Zacks Rank #3 (Hold). Rockwell Collins’ Zacks Rank #3 (Hold) complicates the predictive power of ESP because the Zacks #3 Rank when combined with a negative ESP makes surprise prediction difficult. We thus caution against the stock going into the earnings announcement, especially when the company is witnessing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other companies you may want to consider on the basis of our model which shows that they have the right combination of elements to post an earnings beat this quarter:
Moog Inc. (MOG.A) has Earnings ESP of +1.22% and carries a Zacks Rank #2 (Buy). It is scheduled to report its fourth quarter results on Jan 21.
L 3 Communications Holdings Inc. (LLL) has Earnings ESP of +0.94% and carries a Zacks Rank #3 (Hold). It is scheduled to report its fourth quarter results on Jan 30.
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