It's been close to a year now since the last time Northrop Grumman (NYSE:NOC) so much as just met Wall Street's earnings projections -- much less missed one. Will Tuesday's news mark an end to its winning streak?

What analysts say:

  • Buy, sell, or waffle? Two dozen analysts track Northrop, but the vast majority only think you should hold it. Of the rest, two say buy and one says sell.
  • Revenues. On average, they're looking for a sales rise of 2% to $7.7 billion for Q3 2006.
  • Earnings. But for profits to rise 34% to $1.07 per share.

What management says:
CEO Ronald Sugar's assessment of the year to date was sweet as can be: By business segment, Northrop saw electronics hold onto its "strong operating margin," while information & services, ships, and aerospace all grew their margins impressively. Looking forward, the firm anticipates double-digit earnings growth through the rest of this year, expanding operating margins, and fewer shares outstanding. Moreover, settlement of a tax dispute with the IRS has Northrop now guesstimating that its full-year tax rate won't be the 32%-33% previously anticipated, but only 31%. Put all that in a pot and stir, and you come up with a firm able to raise its 2006 earnings estimate to somewhere in the neighborhood of $4.40 per share, with cash from operations likely to top $2.3 billion.

What management does:
Rolling gross margins continue the same upward march we've seen at Northrop all year long, and after a quarter's lag, operating margins followed them right up. The net margin has been a bit more volatile, but still hovers in the mid-4% range.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

16.3

16.5

16.3

16.7

16.9

17.5

Op.

7.2

7.5

7.2

7.1

7.2

7.4

Net

4.2

4.4

4.4

4.6

4.4

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:
Northrop's bad news can be found on the cash flow statement, where operating cash flow declined $166 million, or 20%, in comparison to last year's second quarter. Then again, maybe "bad" is all a matter of perspective; year-to-date, the firm's operating cash flow has been down by more than 50% -- so the second quarter actually marked an improvement in that regard. Moreover, management seems unconcerned about the apparent drying-up of cash flow, apparently anticipating a massive cash influx in the second half of 2006. In last quarter's earnings release, it maintained previous guidance of $2.3 billion to $2.6 billion in operating cash flow for the year. That said, at last report, the tally stood at: $523 million down, $1.8 billion (or more?) to go.

Whatever qualms we may have about the amount of cash Northrop has been generating, however, it's hard to argue with the uses to which it's been putting that cash. So far this year, it has spent $510 million to pay down its debt, and another $825 million to repurchase its shares, strengthening its balance sheet for any defense-spending downturns down the road while returning cash to shareholders. At this rate, the firm should burn through the rest of its share-buyback authorization in no time (if it hasn't already), reducing the share count by a further 2.6 million shares and giving Northrop a little extra boost toward hitting its increased earnings-per-share guidance.

Competitors

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

What sort of Foolishness have the other defense contractors been up to? Find out in:

Need new ideas for your money? Talk stocks with other investors and our analysts when you give our newsletters a try.

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