Foolish Forecast: Get to Know Northrop

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 fourth-quarter and full-year results. Next up is defense heavyweight Northrop Grumman (NYSE: NOC  ) , which reports on Thursday.

What analysts say:

• Buy, sell, or waffle? Two dozen analysts track Northrop, with a full score voting hold. Of the rest, two say buy and two say sell.
• Revenues. On average, they're looking for a Q4 sales increase of 2% to $8.05 billion.
• Earnings. In contrast, profits are predicted to shoot up 37% to $1.26 per share.

What management says:
Reviewing the firm's third-quarter results three months ago, Northrop CEO Ronald Sugar characterized them as "very strong," and emphasized the nearly $1 billion worth of cash from operations generated. Backlog was up, operating margins up, sales -- mostly up. (Read all about it here.)

What management does:
The one real black mark last quarter was a legal settlement with the Justice Department. By subtracting $0.20 after taxes from net profits, that held the firm's net margin to a gain of just four basis points last quarter. But as a true "one-time" charge, three quarters from now that one will cease to depress the firm's rolling net margins. If the firm can keep its gross and operating margins growing as well as it has been (as reflected below), net margins should bounce back nicely come September 2007.

Margins %	6/05	9/05	12/05	3/06	6/06	9/06
Gross	16.5	16.3	16.7	16.9	17.5	18.2
Op.	7.5	7.2	7.1	7.2	7.4	8.1
Net	4.4	4.4	4.6	4.4	4.7	4.7

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:
The big story Thursday, of course -- both from a cash profits point of view and a management credibility point of view -- will be whether Northrop hits its promised target of $2.3 billion to $2.6 billion in cash from operations for the year. As you may recall, Sugar reiterated that target back in October (sort of), while saying that because the firm intends to up its pension contributions by $800 million in Q4, the new and improved cash-from-ops target will be $1.5 billion to $1.8 billion.

Seeing as Northrop has already generated $1.5 billion in operating cash flow, the new target would seem to be in the bag -- but only if Q4 operations generated enough scratch to fully fund the $800 million pension fund deposit on their own. Can Northrop do it? It's hard to say. Historically, the firm often does show its strongest cash generation in the fourth quarter -- but just as often, cash flows most freely in quarters two or three. Which way this year decides to lean will reveal itself in just 48 hours.

Competitors:

• Boeing (NYSE: BA  )
• General Dynamics (NYSE: GD  )
• Honeywell (NYSE: HON  )
• L-3 (NYSE: LLL  )
• Lockheed Martin (NYSE: LMT  )
• Raytheon (NYSE: RTN  )

What did we expect out of Northrop last quarter, and what did it produce? Find out in:

• Foolish Forecast: Northrop Grumman Knocks
• Northrop Grumman Knocked
• Grumman Groupies, Take Note: Fool by Numbers

Find the right fit for your personal investing needs by sampling any of our Foolish newsletters free for 30 days.

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