Northrop Grumman (NOC) is one of the largest defense contractors in the United States and the world. It is an integrated company that provides a variety of services and products to the United States military and foreign customers. Northrop and Grumman used to be two of the major manufacturers of combat aircraft for the U.S. but now their products are limited. The company has also recently exited the naval shipbuilding industry.
The stock, like most defense contractors, has seen a nice run up in the last six months increasing from a low of $49 in the September time frame to its current price of $60.85 closing Thursday. It is still below the 52 week high it set last July and currently shows no real signs of approaching that value in the near term.
This follows the trends of the whole industry where, despite a consistent increase for most of the major contractors since the middle of last year, growth has stalled. Their stocks have trended to trade in a rather flat profile with none of them showing any real breakout. Northrop, because of some of its moves as well as its diverse product base, may be the one that might break this trend and show some growth in its stock price in the next few months.
Northrop was one of the first of U.S. defense contractors to begin adjusting to the current market dynamics. Early in the Obama administration it sold off TASC; its Scientific, Engineering, Technical and Analytical (SETA) component; to avoid Organizational Conflicts of Interest (OCI) which had the potential to limit its ability to win hardware contracts. At that time TASC was worth about $1.6 billion in revenue a year.
The corporation followed this in 2010 by deciding to spin off their naval construction group as a separate company rather then sell it to another defense contractor. This new company, Huntington Ingalls Industry (HII), inherited yards in Louisiana and Mississippi. The U.S. Navy is looking at severe cuts to its available shipbuilding budget and this would hit HII, which make destroyers and amphibious warfare ships primarily. So far HII has survived recently, seeing a bump in their stock due to improved earnings and revenue in the most recent quarter. Its stock is trading just below the 52 week high.
Northrop has been consistently exceeding analyst estimates for earnings each of the last ten quarters. Most recently, for the fourth quarter of 2011 it beat by 42 cents per share. In 2011 the company had sales of a little over $26 billion. In 2012 it is being conservative and only estimating between $24.7 and $25.4 billion with EPS at $6.40 to $6.70. Based on past performance we might see that beat.
Even with this decent financial performance the stock has not shown similar gains. Year to date it is up less then $5 a share and is slightly below the market. It may be the concerns with the upcoming reductions to U.S. defense spending as well as the future pension costs the company is facing. Its $2.00 a year dividend puts it in line with competitors General Dynamics (GD) and Raytheon (RTN) but it is also half of what Lockheed Martin (LMT) pay. The first two companies recently raised their dividends and it may be expected that Northrop will do the same.
Even with the continued good performance of the company, like other defense contractors, it is facing a little uncertainty. Until the 2013 budget is finalized we won't see what major programs are cut or eliminated. The 2012 budget was fairly flat from 2011 and saw no significant restructuring. This means that overall defense contracting won't see any major changes for several months. Northrop could continue its steady performance but if some important programs were reduced or eliminated that could cause a decline in sales.
Overall, the company seems to be in good shape to weather some of the upcoming issues facing the industry. It is very diverse in its products. It makes some aircraft like the E-2D Hawkeye radar plane for the U.S. Navy as well as major sub-assemblies of the F-35 Joint Strike Fighter as a sub-contractor to Lockheed Martin (LMT). It produces some radars and electronic systems as well as providing cyber security and health IT. Its diversity should help it weather upcoming changes in the market but even so its stock price should not be expected to increase dramatically as the whole industry has struggled over the last quarter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.