L3 Technologies, Inc. LLL is scheduled to release fourth-quarter and full-year 2017 results on Jan 25, before the opening bell.

Last quarter, the company delivered a positive earnings surprise of 1.03%. Its Aerospace Systems segment is not likely to register substantial sales growth in the quarter under review. However, order flow is likely to fuel the company’s bottom-line growth.

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

Is Vertex Divesture a Prudent Move?

Contract price modifications at Vertex Aerospace unit raised concern about L3 Technologies’ Aerospace Systems segment’s growth.  In fact, the company has identified this segment to be its most challenging business and remains skeptical about this unit’s growth rate as well as profitability.

To focus its resources on higher value-added and more profitable business, the company decided to divest the Vertex Aerospace business, at the onset of the fourth quarter. However, the divesture is likely to drive the Aerospace Systems segment’s revenues in the long run and not have any impact in the fourth quarter.

Management further added that several other financial pursuits of this segment will impact its 2018 sales growth. Therefore, the Aerospace Systems segment will most likely suffer a decline in sales year over year.

Evidently, the Zacks consensus estimate for the segment’s fourth quarter revenues is pegged at $539 million reflecting an annual decline of 49.9%.

Orders Growth ­– A Key Catalyst

A smooth order flow tends to boost the bottom line of defense contractors like L3 Technologies. Considering its encouraging order performance, the company’s enhanced its 2017 earnings guidance. Notably the company increased its EPS midpoint by 10 cents to $8.85, reflecting 8% growth over 2016.

Primarily lower taxes and high interest income, along with the favorable contract performance in sensors and electronics businesses led the company to increase its full-year earnings guidance.

Notably the Zacks consensus estimate for 2017 earnings is $8.38 per share, representing 2.1% annual rise.


Unimpressive Top-line Estimates ­

It is imperative to mention that the top-line estimates for L3 Technologies, for both the fourth quarter and full-year 2017, are unlikely to register an annual improvement. The company’s fourth-quarter sales expectation of $2.8-$2.9 billion also reflects 6% decline in organic growth. Probably this prediction led the Zacks Consensus Estimate for fourth quarter earnings of $2.31 per share to reflect 2.9% annual decline.

For 2017, the company lowered its estimated international sales to organic decline of 7% and that’s primarily due to new business delays taking place in aerospace systems unit.

Will Communication Systems Unit Play a Spoilsport?

L3 Technologies is currently consolidating two traveling wave tubes businesses in communication systems segment, which is scheduled to be completed by first-quarter 2018. As a result, this segment is incurring solid traveling wave tube business consolidation expenses, which may hamper its performance in the fourth quarter.

In line with this, our consensus estimate for the unit’s fourth quarter revenues is pegged at $544 million, reflecting 6.5% annual decline.

What the Zacks Model Unveils?

Our proven model does not indicate that L3 Technologies will 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: L3 Technologies has an Earnings ESP of -2.04%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: L3 Technologies currently carries a Zacks Rank #3. 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 a few stocks in the Aerospace and Defense space worth considering on the basis of our model which shows that they have the right combination to pull off a beat:

Huntington Ingalls Industries, Inc. HII is expected to report fourth-quarter 2017 results on Feb 15. The company has an Earnings ESP of +3.43% and a Zacks Rank #2.

Raytheon Company RTN is expected to report fourth-quarter 2017 results on Jan 25. The company has an Earnings ESP of +0.08% and a Zacks Rank #2.

Lockheed Martin Corp. LMT is expected to report fourth-quarter 2017 results on Jan 29. The company has an Earnings ESP of +0.31% and a Zacks Rank #2.

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