We expect L-3 Communications Holdings Inc. (LLL) to beat expectations when it reports fourth quarter and full year results on Jan 30, 2013.
Why a Likely Positive Surprise?
Our proven model shows that L-3 Communications is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings 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 0.94%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank #3 (Neutral): 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 while going into an earnings announcement.
The combination of L-3 Communications’ Zacks Rank #3 (Hold) and 0.94% ESP makes us very confident in looking for a positive earnings beat on Jan 30, 2013.
What is Driving the Better Than Expected Earnings?
Despite defense spending cuts, there seems to be a number of opportunities for the company. Especially, the spin-off of its Government Services businesses has brought ample opportunities for growth and profit expansion. Also, the spin-off has removed a lot of uncertainty with respect to revenue and has taken away some of the low margin businesses of the company.
Apart from the spin-off, L-3 Communications’ focus on additional internal consolidations and divestitures in order to lower overhead costs will allow the company to focus on research and development and increase efficiency while driving performance and shareholder value.
In particular, the company’s diversified nature of business makes it one of the best-positioned pure defense players. Also, we see a positive trend in the trailing four-quarter average surprise of 6.47%, which was mainly driven by the 10.36% surprise in Jun 2012.
Other Stocks to Consider
L-3 Communications is not the only firm looking up this earnings season. We also see likely earnings beat coming from other stocks of the industry.
Tetra Tech Inc. (TTEK) has Earnings ESP of +2.44% and carries a Zacks Rank #2 (Buy).
Esterline Technologies Corp. (ESL) has Earnings ESP of +18.03% and carries a Zacks Rank #2 (Buy).
The Boeing Company (BA) has Earnings ESP of +1.68% and carries a Zacks Rank #3 (Hold).
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