Defense contractor L-3 Communications (NYSE:LLL) reports its 2007 third-quarter earnings results Thursday morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts follow L-3, which garners seven buy ratings, eight holds, and a sell.
  • Revenue. On average, they expect to see 9% sales growth to $3.39 billion.
  • Earnings. Profits are predicted to rise 13% to $1.48 per share.

What management says:
CEO Michael Strianese pronounced himself "very pleased" with L-3's Q2 results back in July. He highlighted a metric we happen to focus a lot on ourselves here at the Fool -- free cash flow. At $349 million for the quarter, it was a new record for the firm, and it brings L-3's total for the year up to around $545 million. How does management intend to spend the cash? Says Strianese: "To increase shareholder value through acquiring attractively priced businesses and repurchasing our common stock."

What management does:
The strong Q2 performance lifted L-3's rolling operating margin by 40 basis points. That put an end to a period in which margins had stagnated, and it placed L-3 comfortably in the middle of the pack of major defense contractors -- a bit more profitable per dollar of revenue than Raytheon (NYSE:RTN), Northrop (NYSE:NOC), and Lockheed (NYSE:LMT), and a bit less profitable than General Dynamics (NYSE:GD). L-3's net profit margins for the past 12 months did even better -- they returned to their levels of 18 months ago.

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Operating

10.5%

10%

10.1%

9.9%

9.9%

10.3%

Net

5.2%

4.2%

4.2%

4.2%

4.3%

5.2%

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:
Now let's return to the subject of free cash flow. Updating its guidance for the year, L-3 advised last quarter that it expects to generate $1.05 billion in cash profits in fiscal 2007. Assuming that management stands by that statement when L-3 reports on Thursday, it would put the firm's price-to-free cash flow ratio at 12.5. If the company can meet or exceed its earnings estimates, then it may come in lower than its 1.3 PEG ratio suggests.

What did we expect out of L-3 last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.