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General Dynamics (GD) Q1 Earnings: A Beat in the Cards?


Defense behemoth General Dynamics Corporation GD is scheduled to release first-quarter 2017 results on Apr 26, before the opening bell.

In the prior quarter, the company reported a positive earnings surprise of 3.15%. It is worth noting that General Dynamics has outperformed the Zacks Consensus Estimate in all the trailing four quarters, the average positive surprise being 5.81%.

Let’s see how things are shaping up for the company prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that General Dynamics is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: General Dynamics has an Earnings ESP of +0.43%. This is because the Most Accurate estimate stands at $2.32, higher than the Zacks Consensus Estimate of $2.31. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: General Dynamics carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates.

Notably, we caution against stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Meanwhile, General Dynamics’ combination of a Zacks Rank #3 and +0.43% ESP makes us reasonably certain of an earnings beat.

What’s Driving the Better-Than Expected Earnings?

Being one of the only two contractors in the world equipped to build nuclear-powered submarines, General Dynamics derives its profits from a broad portfolio of products and services. This, in turn, helps the company to keep its overall growth momentum steady. It also invests heavily in R&D activities that facilitate the introduction of new products and bring about first-to-market enhancements.

Among the notable highlights of the first quarter, General Dynamics announced a 10.5% hike in its quarterly common stock dividend to 84 cents per share. As a result, the annualized payout has totaled to $3.36 per share. Simultaneously, management also approved the repurchase of an additional 10 million shares of the company's issued and outstanding common stock on the open market.

No doubt this reflects the strong cash flow growth General Dynamics enjoys, which allows it to maintain such a flexible liquidity position. Such upside in capital deployment strategies is expected to boost the company’s earnings figure for the first quarter and beyond.

Also, during the yet-to-be-reported quarter, General Dynamics secured notable defense contracts from the Pentagon and other nations. These include a $309 million deal awarded by the Government of Canada to upgrade 141 Light Armoured Vehicle (LAV) III vehicles and a $221 million Army contract for the procurement of M2 flexible, M2 fixed, and M2A1 machineguns.

Going forward, earlier, management projected increased international activity for the company all through 2017. We expect the yet-to-be-reported quarter’s results to reflect the same.

Moreover, General Dynamics, at the very start of the first quarter, adopted a new revenue recognition standard, ASC topic 606. As a result of this adoption, the company’s aircraft manufacturing revenue will be recognized when control is transferred to the customer, i.e., when the customer accepts the fully outfitted aircraft. This, in turn, might impact the company’s revenue growth trajectory, of Gulfstream in particular, starting from first quarter. However, this standard is expected to have no adverse impact in the long run.

For the first quarter, the Zacks Consensus Estimate for earnings stands at $2.31 per share, down 1.18% year over year, while the revenue estimate is pegged at $7.60 billion, implying a 1.66% year-over-year decline.

Other Stocks that Warrant a Look

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Leidos Holdings, Inc. LDOS is expected to report first-quarter 2017 results on May 4. The company has an Earnings ESP of +1.28% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lockheed Martin Corp. LMT is expected to report first-quarter 2017 results on Apr 25. The company has an Earnings ESP of +1.83% and a Zacks Rank #2.

Northrop Grumman Corp. NOC is expected to report first-quarter 2017 results on Apr 26. The company has an Earnings ESP of +0.35% and a Zacks Rank #2.

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