Analysis And Valuation: Northrop Grumman, General Dynamics, Ingalls Industries

Includes: GD, HII, NOC
by: CRG Research

Congress authorizes defense spending and defense spending is a large portion of the revenue generated by defense contractors. In this article we review a few of the defense contractors.

The U.S. House is getting ready to vote on a $554B defense authorization bill. The bill is $4B more than President Obama wants to spend on defense. Last week, the House Armed Services Committee rejected a proposal to curtail or slow weapons programs. They include Northrop Grumman's Corp.'s (NYSE:NOC) Global Hawk drone and General Dynamics Corp.'s (NYSE:GD) Abrams battle tanks as well as Virginia-class submarines built by Huntington's Ingalls Industries Inc. (NYSE:HII) and the Electric Boat unit of General Dynamics.

We'll take a look at portions of the financial statements (principally), and the technicals (secondarily) of these firms and produce an investment recommendation.

Northrop Grumman - Neutral

Revenue is declining, a bearish sign.

Book value is declining, a bearish sign.

Revenue share is increasing, average basic shares outstanding is decreasing faster than revenue is declining. Given the reason for the increase, the rise in revenue-share is a bearish sign.

Book value is decreasing faster than average basic shares outstanding. The decline in book value-share is a bearish sign.

Share price increased with the broader market following the October 2011 low, and is in a minor down trend. The share price hasn't been able to rise above its 2011 high, a bearish sign.

Sales are declining as share price is increasing; price-sales has been relatively flat over the past year. That being said, price-sales is roughly 10% off of its 2011 low. Given the decline in sales, the price-sales valuation metric is giving a neutral sign.

Price Target: $61

General Dynamics - Neutral

Revenue is relatively flat, a neutral sign.

Book-value is rising, a bullish sign.

Revenue-share is increasing; average weighted basic shares outstanding is declining.

Book value-share is increasing, a bullish sign.

Share price is starting to decline; it has also failed to rise above its 2011 peak.

Price-sales is declining; the ratio is well off of its 2011 low.

Price-book value is in a down trend; the ratio is making lower highs and lower lows.

Overall, revenue has been flat while book value has increased. The enterprise would make a better buy at a lower valuation. Given the current state of the market, the share price could continue to decline, and investors should have already trimmed positions in the enterprise. Investors should accumulate at a price-sales ratio of 0.67 and price-book value below 1.6.

Price Target: $70

Huntington Ingalls Industries - Neutral

Revenue is near a bottom formed in the second quarter of 2011. Overall, revenue is range bound.

Book value is declining; the decline in book value is a bearish sign.

Revenue-share is declining; the decline in revenue-share is a bearish sign.

Book value-shares is declining; the decline in book value-share is a bearish sign.

The share price of common equity is rose from the 2011 low; share price is currently declining.

Price-sales is near a peak and well off of the 2011 low.

Price-book value is near a high for the period reviewed; the price-book value level is a bearish sign.

Based on the decline in revenue-share and book value-share we don't like this issue. When valuation metrics decline, the rating may change depending on the fundamentals of the business.

Price Target: $39

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.