Foolish Forecast: Rockwell Collins on the Radar

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For 10 straight quarters -- two-and-a-half years -- aviation electronics specialist Rockwell Collins (NYSE: COL) has beaten analyst expectations with a stick. On Friday, Rockwell pulls out the cudgel again as it reports its fiscal third-quarter 2008 earnings news. Who'll come away bruised this time around?

What analysts say:

• Buy, sell, or waffle? Seventeen analysts keep Rockwell on their radar, giving the stock 11 buy ratings, four holds, and a pair of sells.
• Revenue. On average, they're looking for sales to rise 9% to $1.21 billion.
• Earnings. Profits are predicted to soar 19% to $1.02 per share.

What management says:
After reaching the halfway mark for its fiscal year, Rockwell paused to tell us where it expects to be by year-end. Briefly, management projects fiscal 2008 sales will top out at "about $4.75 billion" and operating margins earned thereon will top 22%. Rockwell's predicting net profit of about $4 a share, and free cash flow in the neighborhood of $530 million.

What management does:
In addition to its forecast, Rockwell regaled us last quarter with the tale of how it combined respectable quarterly sales growth (10%) with modest margins improvement (about 40 basis points at the operating level) to yield diluted earnings-per-share growth of 26%. The secret ingredient: share buybacks. By significantly reducing its share count, Rockwell turbocharged the amount of profits accruing to its remaining shares.

But as you can see, the trailing-12-month results tell a somewhat different story. Rolling gross and operating margins are actually down ever so slightly, though still high enough to make rivals like Raytheon (NYSE: RTN) and Boeing (NYSE: BA) drool. And net profit margins are back on the upswing.

Margins	12/06	3/07	6/07	9/07	12/07	3/08
Gross	29.3%	29.6%	29.6%	30.0%	30.1%	29.8%
Operating	17.9%	18.5%	18.6%	19.0%	19.4%	19.3%
Net	13.0%	13.2%	13.3%	13.3%	13.1%	13.5%

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:
Getting back to those buybacks. As I pointed out last quarter, everybody who's anybody in the defense world was following Rockwell's lead earlier this year. Share repurchases have been in vogue at many of Rockwell's peers, with General Dynamics (NYSE: GD), L-3 Communications (NYSE: LLL), Goodrich (NYSE: GR), and Lockheed Martin (NYSE: LMT) dipping into the cash kitty to pick up extra shares

The trick for Rockwell will be finding the "grease" to keep its buyback machine moving. The company's free cash flow plunged in the first half of fiscal 2008. While Rockwell still had about $200 million in cash on its books (outweighed by long-term debt of about $230 million) at last report, it really needs to generate more cash if it wants to take advantage of its slumping share price.

Now, maybe management is correct, and free cash flow will leap from around $50 million at the end of the first half to around $530 million at the end of H2. But with the stock now down 28% over the past year, it'll be a crying shame if Rockwell can't raise the cash to take advantage of its shares' bargain prices.

Rock out to more Rockwell Foolishness:

• Rockwell Collins' Cryptic Catch
• Foolish Forecast: Rockwell Collins Rocks