As most companies on Wall Street continue to sound their optimistic notes about the future of 2007, government contractor DynCorp (NYSE:DCP) is preparing to draw its fiscal year 2007 to a close. Fourth-quarter and full-year earnings are due out Thursday.

What analysts say:

  • Buy, sell, or waffle? Eight analysts follow DynCorp, which gets three buy ratings and five holds.
  • Revenue and earnings. As far as we can tell, the analysts have not published any estimates for the firm's revenues, but they do predict $0.28 per share in earnings for the quarter and $0.43 for the year.

What management says:
Recapping year-to-date performance in last quarter's Q3 earnings report, DynCorp reported 8% sales growth and a tripling of profits per diluted share -- no mean feat, given that share count, too, had increased by more than two-thirds as a result of its May 3, 2006, IPO.

As for how the rest of the year will look, management predicted $0.45 per share in profits for the full year -- raising the possibility of an "earnings beat" if management is right and the analysts are wrong tomorrow -- on $2.05 billion to $2.1 billion in revenue. That would make for somewhere between 4% and 7% sales growth and a "mere" doubling of earnings per share.

What management does:
As good as that all sounds, if you're looking for a consistent uptrend in this firm's profit margins, I'm afraid you're in for disappointment. Costs associated with the IPO have pushed margins one way, while benefits from this financing event -- for example, lower interest payments -- push the other way. The result is a generally rising gross margin at odds with volatility in operating and net margins. These latter metrics rise one quarter only to fall the next -- even when viewed from the smoothing vantage point of trailing-12-month performance.

For context, the three firms that according to Yahoo! Finance are DynCorp's closest competitors -- General Dynamics (NYSE:GD), Lockheed Martin (NYSE:LMT), and Northrop Grumman (NYSE:NOC) -- earn operating margins of 10.9%, 9%, and 8.7%, respectively.





























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:
Oftentimes, when GAAP numbers fail to give me a clear picture of what's going on at a company, I turn to the firm's cash flow statement to see whether the free cash flow picture is any clearer. No luck here.

On the one hand, DynCorp seems much more profitable from a cash-profits perspective than it looks under GAAP -- nearly five times more profitable, in fact. That's the magnitude of difference between free cash flow so far this year ($40 million) and net income ($8.1 million). But if that sounds good, then consider that one year ago, cash profits outstripped accounting profits by more than 30-to-1. According to management, this came about because of "unusually high accounts receivable collections in fiscal 2006," which have not repeated in 2007.

A moving together of net income results and free cash flow is to be expected, of course. All I mean to say here is that before you get too frightened by seeing free cash flow move in the "wrong direction" in recent quarters, there's a reason it's happening. Keep that in mind when reading tomorrow's news.

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