When writing a Foolish Forecast, my aim is usually to do anything but make an actual forecast about what, precisely, a company's impending earnings news will contain.
Oh sure, I'll go over a few trends that seem to be forming, bring you up to date on what's been happening at the company recently, and suggest a few things to focus on in the earnings report -- but make a clear-cut call that a company's going to "beat estimates" or "miss estimates"? That's not our style at the Fool. For one thing, it would too closely echo Wall Street's obsession with short-term results, as opposed to the long-term investing we practice. For another, I have no pretensions of being able to predict the future -- not even one day ahead. In the short term, anything can happen.
Speaking of which, on Wednesday, anything did happen. After writing up my Foolish Forecast on defense contracting powerhouse General Dynamics
And how. One day after that observation was published, the General proved it in spades, reporting results that soundly beat analyst estimates on both sales and profits. The former came in at $5.9 billion, and the latter, at $1.03 per share. According to CEO Nicholas Chabraja, each of the firm's four operating divisions, including the information systems unit that underperformed slightly last quarter, improved their sales and operating profits year over year. In response, the company's shares rose nearly 3%.
In the Foolish Forecast, I observed that net profit margin, although on the rise, remains below the level of profitability it has historically been able to boast. That's a primary factor in my thinking that the turnaround is not yet complete, and that the business, and the stock, both still have room to run as rising sales couple with improving profitability to turbocharge profits. By the same token, though, investors should not be lulled by the fact that the company posted a 10.7% net margin in Q2 (a full 400 basis points higher than in last year's second quarter) into thinking that the General will now begin netting 10%-plus in future quarters.
That's because the Q2 2006 results were boosted by $216 million of profits from discontinued operations -- profits that you should not expect to recur. That said, once you back out the one-time profits infusion, the company still achieved a 7.1% net margin, which is much closer to its historical norms and could well prove sustainable in the future. In closing, I'll say it again: Victorious in its battle with analyst expectations this week, General Dynamics is winning this war. The turnaround isn't over yet.
Sing it with me, Fools: "Second verse, same as the first!" General Dynamics stunned the Street and rewarded its investors last quarter as well. Wallow in the nostalgia as you read Jeremy MacNealy's "General Dynamics Soars."
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Fool contributor Rich Smithdoes not own shares of any company named above.
