Whether by air, land, or sea, when you think defense, you have to think Northrop Grumman (NYSE: NOC). The firm plays No. 1 to General Dynamics' (NYSE: GD) runner-up in naval shipbuilding; competes with Lockheed Martin (NYSE: LMT) and Boeing (NYSE: BA) on military aircraft; and skirmishes with Textron (NYSE: TXT), General D, and Force Protection (Nasdaq: FRPT) for armored-vehicle contracts.

Tomorrow, though, Northrop duels the most fearsome antagonist of all -- Wall Street expectations -- as it reports its fiscal Q4 and full-year 2007 earnings numbers. Here's how the order of battle appears.

What analysts say:

  • Buy, sell, or waffle? Nineteen analysts still track Northrop. Three say to buy it, 15 to hold it, and one analyst would sell the stock.
  • Revenue. On average, analysts predict 5.5% quarterly sales growth to $8.46 billion.
  • Earnings. Profits are predicted to rise a percent or two, to $1.31 per share.

What management says:
Big news and potentially big news were on offer at Northrop this quarter. Big news first: In December, the company authorized a buyback of as much as 9% of its total share count -- $2.5 billion in all. As I described at the time, falling interest rates, a dividend that already dwarfs those of its rivals in size, and a not-unreasonable price per share all argue in favor of this buyback.

On the "potential" side of the equation, Northrop submitted one bid for the KC-X Tanker Program, hoping to beat out Boeing in the competition to build the Air Force's next-generation in-flight refueling aircraft. Closer to ground level, Northrop also teamed with Oshkosh in a bid to build the Army's next-generation jeep, so far known only by its JLTV (joint light tactical vehicle) acronym. Combined, these two bids offer the potential for tens of billions of dollars of future revenue.

What management does:
Of course, revenue isn't worth much unless you can earn a profit on it. Fortunately, Northrop's just been doing better and better in that regard. Operating and net margins have both climbed steadily over the past 18 months.

Margins

6/06

9/06

12/06

3/07

6/07

9/07

Operating

7.7%

8%

8.5%

8.7%

8.8%

9.5%

Net

4.8%

4.8%

5.1%

5.2%

5.2%

5.7%

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:
Things are going well at Northrop -- but how long will the good times keep rolling? Investing in the megadefense contractors, with their numerous moving parts, makes getting a grip on the whole a tricky endeavor.

One "big picture" tool at our disposal, though, is the backlog number that these firms routinely report alongside their earnings. Some give us their "funded backlog" numbers. Some give "total backlog." The most shareholder-friendly firms -- Northrop and SAIC (NYSE: SAI) among them -- break down funded and unfunded backlog (defined by Northrop as "firm orders for which funding is not currently contractually obligated by the customer"). Here's how these numbers are trending at Northrop:

Q3 2005

Q3 2006

Q3 2007

Funded backlog

$23.3 billion

$26.4 billion

$30.4 billion

Unfunded backlog

$32.8 billion

$33.4 billion

$33.7 billion

Total backlog

$56.2 billion

$59.8 billion

$64.1 billion

YTD revenues

$22.9 billion

$22.1 billion

$23.2 billion

The way I read this, we've got revenue pretty much stagnant, but backlog up 14% over the last two years. What's more, the funded portion of that backlog -- firm orders for which the customer must pay -- is growing faster than total backlog. Call me an optimist if you must, but I like where this ship is headed.

For a more prose-intensive description of how Northrop is doing, read:

Fool contributor Rich Smith owns shares of Force Protection, a Motley Fool Rule Breakers Selection. SAIC is an Inside Value pick. The Motley Fool has a disclosure policy.