On Thursday morning, before the stock market opens for business, Northrop Grumman (NOC +1.84%) will report its financial results for fiscal Q4, and for 2016 as a whole.
Arguably, this will be Northrop Grumman's most important earnings report of the year -- not just because it will contain the financials for the whole year, but also because it will tell us what effect Northrop's winding down of its stock buyback program has had on the company's earnings.
The A-10 Warthog is one of Northrop's better known defense programs -- but it's not a big money-maker. And this quarter, Northrop really needs to earn some more money. Image source: Northrop Grumman.
What we know so far
So far, we've seen three quarterly earnings reports out of Northrop Grumman. Here's how the numbers look, year to date, according to financial data provider S&P Global Market Intelligence -- and relative to what Northrop Grumman reported one year ago, and what analysts have told us to expect this year:
|
Metric |
YTD |
Fiscal 2015 |
Fiscal 2016 (Estimated) |
|---|---|---|---|
|
Revenue |
$18.1 billion |
$23.5 billion |
$24.0 billion |
|
Earnings |
$1.7 billion |
$2.0 billion |
$2.1 billion |
|
Free cash flow |
$674 million |
$1.7 billion |
$1.7 billion |
Data source: S&P Global Market Intelligence.
If the analysts are right, Thursday's report will not herald a whole lot of growth for Northrop Grumman. Revenue is expected to rise only 2%, and earnings a bit better at 5% -- with free cash flow roughly unchanged year over year at $1.7 billion -- and nearly 20% below GAAP earnings. Anything better than these modest expectations should constitute an earnings "beat."
Can Northrop Grumman deliver?
What are the chances of that happening? Well, as we stand at the cusp of fourth-quarter earnings, Northrop Grumman already has three quarters of the revenue that it's supposed to book this year "in the bag." Eighty-one percent of the year's hoped-for earnings has already been earned, too -- but Northrop has generated only 40% of the free cash flow analysts want to see it produce.
As far as the company's own guidance goes, management predicted in October that it would end this year with between $23.9 billion and $24.1 billion in revenue -- so Wall Street appears to be splitting the difference and aiming for the midpoint. Management said earnings per share will range between $11.55 and $11.75. On a share count of 176.3 million, that works out to, at most, $2.1 billion in profits -- and Wall Street is looking for Northrop to max out that number.
In terms of free cash flow, Northrop is looking for something between $1.5 billion and $1.8 billion, so here, too, Wall Street will want to see Northrop come in at the high range of its estimates, which could be difficult given how little cash Northrop has generated over the first three quarters of the year.
What it all means for investors
All things considered, even targeting only modest growth expectations, Northrop Grumman has a tough row to hoe if it wants to keep Wall Street happy on Thursday. Management must deliver on its revenue target, max out earnings, and generate more than twice as much cash profit in Q4 as it has produced in quarters one through three combined.
At the same time, management has officially concluded its massive effort to buy back 25% of its shares outstanding, which was first announced back in 2013. Northrop's CFO called that a "one-time deal," so if Northrop wants to keep its earnings per share growing at their recent impressive clip, they'll have to do it the old-fashioned way: They'll have to earn it.
