After a truly awful Q2, defense contractor L-3 Communications (NYSE:LLL) put together two earnings beats in a row in the second half of last year. As we head toward the first report of fiscal 2007 (due Monday morning), investors wonder -- can L-3 make it three in a row?

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts follow L-3, which garners eight buy ratings, eight holds, and a pair of sells.
  • Revenues. On average, they expect to see 10% sales growth to $3.2 billion.
  • Earnings. Profits are predicted to rise 12% to $1.27 per share.

What management says:
Happy anniversary, L-3! For those of you who weren't paying attention in April 1997 (I know I wasn't), this month marks the 10th anniversary of L-3's founding, a fact pointed out by CEO Michael Strianese in last quarter's earnings release.

Ten years later, L-3 has no intention of slowing down. In the release, Strianese announced his intent to generate "significant cash flows that will be used to increase returns for our shareholders through share repurchases, dividends and continued acquisition growth." That's in addition to one of the firm's other key objectives: organic growth. Heading into 2007, Strianese laid out his objectives for this year: $13 billion in sales, $5.60 per share or so in profits, and an even $1 billion in free cash flow.

What management does:
L-3's gross margins don't seem to be forming any particular trend, swinging wildly from quarter to quarter, even when viewed from the kind of trailing-12-month perspective that's designed to smooth results out. At the operating and net margin levels, in contrast, there has been a trend -- downward. Fortunately, it appears to have stabilized, with operating and net margins holding steady for a couple of quarters now.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

13.5%

10.6%

12.8%

12.6%

12.7%

10.3%

Operating

10.8%

10.6%

10.5%

10.3%

10.4%

10.3%

Net

5.6%

5.4%

5.2%

4.2%

4.2%

4.2%
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:
Revenues, profit margins, net profits, and free cash flow are all important metrics, and all worth paying attention to next week -- but they're not the only things worth watching. Two less quantifiable items also deserve your attention. First, the ongoing dispute among (deep breath): L-3, rival DynCorp (NYSE:DCP), the U.S. Government Accountability Office (GAO), and the U.S. Army, over contracts to provide translation services to the U.S. military, whose contracts L-3 inherited when it purchased Titan in 2005.

As previously mentioned, DynCorp scored a surprise victory in beating out L-3 for the renewal of these contracts last year. L-3 promptly challenged this award. That was followed by the GAO upholding L-3's challenge in March 2007, which was in turn followed by the Army objecting to the GAO's decision last week.

What's that mean to investors? For one thing, it seems clear that the Army isn't pleased with L-3, or else it wouldn't be fighting so hard to switch to DynCorp. That's bad. On the other hand, the good news is that L-3 gets to keep working under its existing contracts until the dispute is resolved. And on a third hand, the longer this dispute remains unresolved, the more chance the entire contract could be put up for a new bid, raising the risk that other competitors such as SAIC (NYSE:SAI) might steal the business away from both L-3 and DynCorp.

For more on L-3's recent history, read:

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