We have maintained our Neutral recommendation on
Northrop Grumman Corp.
) on Aug 26, 2013, based on strong second quarter earnings,
steady flow of contracts and efficient cash deployment strategy.
Our view was partly tempered by delayed funding authorizations.
Why the Reiteration?
Northrop Grumman has a strong presence in Air Force, Space &
Cyber Security programs. Last month, the company posted strong
second quarter results on the back of a lower share count and a
strong operating performance.
Revenue and earnings growth continued to be driven by its
strong presence in the current focus areas of cyber security,
modernization of defense and homeland security assets,
intelligence, surveillance and reconnaissance systems, advanced
electronics and software development.
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The company has indicated that though the budget environment is
unpredictable, it will continue to focus on aligning the
portfolio with the priority areas of investment for global
Northrop Grumman is taking several initiatives to ensure further
alignment with its customers' needs in order to increase
affordability and cost competitiveness. While the company's
Global Hawk program is maturing, the company continues to
progress well on other unmanned programs, such as Alliance Ground
Surveillance and Fire Scout program.
Despite the positives, we remain concerned about the defense
cutbacks on high-cost platform programs, a declining order
backlog, over-exposure to the Department of Defense budget, cost
over-runs and reductions in the Afghanistan and Iraq operations,
and high exposure to fixed price contracts.
Other Stocks to Consider
Northrop Grumman presently retains a Zacks Rank #2 (Buy). Other
stocks worth considering in the space are
Alliant Techsystems Inc.
Lockheed Martin Corp.
Huntington Ingalls Industries, Inc.
). While Alliant Techsystems carries a Zacks Rank #1 (Strong
Buy), Lockheed Martin and Huntington Ingalls hold a Zacks Rank #2