Can Contract Wins Drive General Dynamics' (GD) Q4 Earnings?

General Dynamics Corporation (NYSE:GD) is scheduled to release fourth-quarter and full-year 2017 results on Jan 24, before the opening bell.

We believe substantial inflow of military contracts from Pentagon will continue to drive the military shipbuilder’s revenues in the fourth quarter. However, Aerospace segment may face margin pressure in the quarter under review, as is evident from the expected annual decline in operating earnings.

Let’s take a detailed look at the factors influencing General Dynamics’ quarterly results.

Order Growth to Boost Sales

Order flow form Pentagon as well as foreign allies of the United States generally boost quarterly sales of defense bellwethers and General Dynamics is no exception. In this line, the Zacks Consensus Estimate for the company’s fourth quarter sales is $8.4 billion, reflecting 2.5% year-over-year growth. Management also remained optimistic about the company’s fourth quarter order growth, which led it to project revenue growth of 15%, sequentially.

Notably, the contracts that General Dynamics secured in the fourth quarter, include a $2.6-billion deal for upgrading 786 M1A1 configured Abrams vehicles in relation to the newly configured M1A2 System Enhancement Package Version 3; an agreement worth $198 million for the procurement, manufacturing, testing and delivery of the AN/USC-61(C) Digital Modular Radio (DMR) systems.

Moreover, the company’s business division, Electric Boat, secured a modification contract worth $432 million for providing fiscal 2018 lead yard services and development studies and design efforts for Virginia-class submarines.

The contract wins throughout 2017 will surely bolster the company’s full-year revenues, as is evident from the 4.9% growth reflected by our consensus estimate for the full year.

Will Aerospace Segment be a Spoilsport?

During second-quarter earnings call, General Dynamics’ management expressed concern about the Aerospace segment’s sales growth in the second half of the year, citing unfavorable margins to play a spoilsport. In line with this, fourth-quarter consensus estimate for the segment’s revenues is pegged at $1,930 million, reflecting a year-over-year decline of 13.2%. Operating earnings for this business unit is also projected to reduce by 20.6% to $348 million, per our consensus estimate.

Although the company continues to have a strong forte in the Gulfstream business, which exhibits strong pipeline growth, a substantial downtick on the margin may hamper this segment’s overall fourth-quarter growth.

Other Factors at Play

Segment-wise, other three business units of General Dynamics indicate positive annual sales growth, considering the respective Zacks Consensus estimate.

On the bottom-line front, a higher effective tax rate in the fourth quarter is expected to result in lower earnings. Evidently, our consensus estimate for General Dynamics’ earnings is pegged at $2.36 per share, reflecting 9.9% annual decline. The full-year earnings estimate of $9.81 per share also represents a 0.6% drop.

What the Zacks Model Unveils?

Our proven model show that General Dynamics is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Zacks ESP: General Dynamics has an Earnings ESP of +0.19%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: General Dynamics currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Stocks That Warrant a Look

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

Huntington Ingalls Industries, Inc. (NYSE:HII) is expected to report fourth-quarter 2017 results on Feb 15. The company has an Earnings ESP of +3.43%.

Raytheon Company (NYSE:RTN) is expected to report fourth-quarter 2017 results on Jan 25. The company has an Earnings ESP of +0.08%.

Lockheed Martin Corp. (NYSE:LMT) is expected to report fourth-quarter 2017 results on Jan 29. The company has an Earnings ESP of +0.31%.

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