Foolish Forecast: L-3's Communicating

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Now that Christmas is out of the way, it's time for that other "most wonderful time of the year" -- year-end earnings season, when those companies whose fiscal years align sensibly with the calendar version report their Q4 and full-year results. Next up is defense and security specialist L-3 Communications (NYSE: LLL), which reports bright and early Wednesday morning.

What analysts say:

• Buy, sell, or waffle? Eighteen analysts follow L-3, which garners nine buy ratings, six holds, and three sells.
• Revenues. On average, they expect to see quarterly sales increase 14% to $3.32 billion.
• Earnings. Profits are predicted to rise 10% to $1.36 per share.

What management says:
The big news at L-3 this quarter came in two installments, with the second being less than two weeks old. Following Michael Strianese's elevation to the CEO's chair, his former position as CFO was filled on Jan. 18 by Ralph D'Ambrosio, a 10-year company veteran.

In operational news, in December it was learned that L-3 lost a bid to continue providing translation services to the U.S. military (a legacy of its 2005 acquisition of Titan). The loss of the contract, valued at $4.65 billion, forced management to cut next year's forecast by $500 million in sales and $0.15 per share in profits. At last report, the company was expecting to book $13 billion in revenues and $5.50 per share in profits. The good news, though, is that because it's challenging the contract's award to rival DynCorp (NYSE: DCP), the challenge process will likely (at least) prolong L-3's revenue stream for another few months.

What management does:
After a long string of declining quarters, L-3's rolling margins finally ticked up last quarter on both a gross and operating basis. Bottom-line margin erosion also stabilized -- the trick on Wednesday will be to get it heading back upwards.

Margins	6/05	9/05	12/05	3/06	6/06	9/06
Gross	13.9%	13.5%	13.0%	12.8%	12.6%	12.7%
Operating	10.9%	10.8%	10.6%	10.5%	10.3%	10.4%
Net	5.7%	5.6%	5.4%	5.2%	4.2%	4.2%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As for how to keep the upwards momentum going, the key seems to be containing expenses. Over the last two quarters, year-over-year growth in sales has been quite strong -- up 35%, but matched by both cost of sales growth (35%), and exceeded by growth in operating costs (38%).

Inefficient working capital management probably isn't helping matters. During the same period of 35% sales growth, average levels of accounts receivable have more than doubled (up 204%), as have average levels of inventories (up 110%). When perusing Wednesday's news, investors can therefore look to any of these line items for signs of improvement as evidence that the firm can maintain its newfound upwards trajectory in profitability.

Competitors:

• Boeing (NYSE: BA)
• General Dynamics (NYSE: GD)
• Northrop Grumman (NYSE: NOC)
• Honeywell (NYSE: HON)
• Lockheed (NYSE: LMT)
• Raytheon (NYSE: RTN)

For the 411 on L-3's Q3, read:

• Foolish Forecast: L-3 Lacking
• (L-)3 Lessons for Investors

Fool contributor Rich Smith does not own shares of any company named above.