'Tis the season for earnings reports and, in particular, for the nation's defense contractors to wind up their fiscal years.
United Technologies (NYSE: UTX ) and General Dynamics (NYSE: GD ) start tomorrow, followed by Textron, Northrop Grumman (NYSE: NOC ) , and Lockheed Martin (NYSE: LMT ) on Thursday. Boeing (NYSE: BA ) , L-3 (NYSE: LLL ) , and Raytheon (NYSE: RTN ) bring up the rear next week.
Assuming my keyboard holds up, we'll preview each of these reports ahead of time, then run down the results as they happen. First up: General Dynamics, which reports tomorrow morning.
What analysts say:
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Buy, sell, or waffle? Eighteen analysts still follow General D. Still 10 buys. Still eight holds.
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Revenues. On average, they expect to see quarterly sales increase 16% to $7.5 billion.
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Earnings. Profits are predicted to rise 25% to $1.41 per share.
What management says:
Reviewing General D's Q3 performance three months ago, CEO Nicholas Chabraja reiterated a promise to "focus on performance, free cash generation, and disciplined capital deployment."
What management does:
With operating margins rising slowly but surely over the past 18 months, the numbers back up Chabraja's statement on the performance front. General Dynamics' having marshaled better free cash flow than it reported as net profit in each of Q3 and the first nine months of the year (free cash flow came to $0.8 billion and $1.6 billion, respectively) backs up his second assertion.
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Margins
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7/06
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10/06
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12/06
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4/07
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7/07
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9/07
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Operating
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10.8%
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10.9%
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10.9%
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10.9%
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11.1%
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11.2%
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Net
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7.9%
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8.0%
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7.7%
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7.7%
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7.0%
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7.2%
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Data courtesy 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:
But what about that last bit about "disciplined capital deployment"? Here I must break ranks with the General. As I argued last month, management's plan to spend nearly $1 billion buying back its stock doesn't make a lot of sense because the company sports the "highest P/E among its peers, and the lowest growth rate."
What's more, I have some concerns about how quickly General Dynamics will be growing in the near future. You see, this earnings season, I'm running down the "backlog" numbers at all the major defense contractors for clues to what their futures might hold. General Dynamics makes this easy for us because it's one of those stand-up firms that provides its backlog numbers right up front, with funded and unfunded portions broken out separately. Here's how they look:
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Q3 2005
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Q3 2006
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Q3 2007
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Funded backlog
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$29.3 billion
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$31.7 billion
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$36.9 billion
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Unfunded backlog
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$14.1 billion
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$12.7 billion
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$9.6 billion
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Total backlog
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$43.4 billion
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$44.4 billion
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$46.5 billion
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YTD revenues
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$15.4 billion
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$17.5 billion
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$19.7 billion
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As you can see, up to now, things have been going well for the General. Revenues are up 28% over the past couple of years, and funded backlog has come close to keeping pace, up 26%. The problem is, unfunded backlog is down, and total backlog is up just 7%. That suggests to me that while past revenues have been strong, and General D has done a great job of capitalizing on that strength by growing its profit margins, future growth could be in jeopardy if we don't see backlog growth kick back into high gear.
When earnings come out tomorrow, trust that I'll be looking particularly hard at the trend in backlog -- and I advise you to do likewise.
Get a better general picture of the General's recent performance with:
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