'Tis the season for earnings reports, and for defense contractors in particular. All the big names are coming out with their Q2 news -- United Technologies (NYSE:UTX) and Textron have already reported. Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) release on Tuesday, Boeing (NYSE:BA), and General Dynamics (NYSE:GD) on Wednesday, and L-3 (NYSE:LLL) and Raytheon (NYSE:RTN) play rear guard on Thursday. It'll take some time to get to everyone, but we're going to preview 'em all for you right here. This time around: Northrop.

What analysts say:

  • Buy, sell, or waffle? Twenty-two analysts track Northrop, down two from last quarter. The stock gets one buy rating, one sell rating, and 20 holds.
  • Revenues. On average, analysts predict 5.5% sales growth to $8.02 billion.
  • Earnings. In contrast, profits are predicted to drop two cents to $1.24 per share. Hmm.

What management says:
Reviewing Q1 results back in April, CEO Ronald Sugar described sweet results of "increased sales, operating margin and earnings per share," and more cash generated from operations to boot. With all of its divisions performing "well," management saw fit to hike its dividend 23%, buy back about 8 million shares in the quarter, and confirm its annual guidance of $31 billion to $32 billion in sales, profits from continuing operations of $4.80 to $5.05, and operating cash flow of $2.5 billion to $2.8 billion.

No word on capital expenditures for the year, but it's perhaps instructive that while Northrop reduced its capital spending in Q1 (compared to Q1 2006), when you net out the "extra" spending to repair damage inflicted by Hurricane Katrina (remember her?), it looks like Northrop boosted non-Katrina spending by more than 18% year over year. While one quarter does not a trend make, it could become a trend, which wouldn't bode well for free cash flow this year.

What management does:
Whoever it was that first asked "War ... what is it good for?" (hint: it was the Temptations) ought to take a look at Northrop's margins over the last 18 months. Clearly, war is good for a big defense contractor's operating and net profitability.






















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 divides its business into four main segments: Information & Services (I&S), Aerospace, Electronics, and Ships. Respectively, these four segments account for 33%, 29%, 20%, and 18% of revenues. As of last quarter, the middle two segments were Northrop's most profitable, with both Aerospace and Electronics boasting double-digit operating margins. The fact that the firm's biggest division, I&S, produced just 8% margins helped to drag down overall profitability to where you see it stand today, at 8.7%.

Trendwise, that seems like something we should keep an eye on going forward, and in Tuesday's news in particular, because I&S has shed 60 basis points worth of profitability over the last year. Aerospace and Ships helped to take up some of the slack by improving their own respective margins, and that needs to continue unless and until I&S rights its own ship. Otherwise, analysts' prediction of a decline in earnings on Tuesday could become a trend in its own right.

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