We have maintained our Neutral recommendation on
Northrop Grumman Corporation
) on May 22, 2013 on the back of its improved performance and
lower share count that led to a top and bottom line beat in the
first quarter. However, offsetting these positive factors to some
extent is the uncertainty related to the defense budget. The
company currently has a Zacks Rank #3 (Hold).
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Why the Reiteration?
Northrop Grumman posted strong first quarter 2013 results with
both the top and bottom line beating the Zacks Consensus
Estimate. The results were driven by an improved performance and
During first quarter 2013, cost of products and services
decreased to $4.78 billion from $4.84 billion in the prior-year
quarter. General and administrative expenses also declined to
$558 million from $561.0 million in the year-ago quarter. In
order to improve its cost competitiveness, the company is closing
and consolidating numerous facilities.
Also during the quarter, the company repurchased 6.5 million
shares of its common stock for approximately $456 million.
However, this is not the end. Recently, the Board of Directors of
Northrop Grumman has approved of an additional repurchase of the
company's common stock worth $4 billion. With this new approval,
the company currently has total outstanding share repurchase
authorization of $5 billion.
Northrop Grumman has also increased its quarterly dividend by 11%
bringing the annualized payout to $2.44 per share from $2.20 per
share earlier. The quarterly dividend, after the hike, will come
to 61 cents per share, up from the prior payment of 55 cents per
share. With the current annual dividend, the company generates a
dividend yield of 3.02%. In fact, Northrop Grumman's strong cash
position provides substantial financial flexibility to focus on
its cash deployment approach.
Moreover, Northrop Grumman is taking several initiatives to
ensure further alignment with its customers' need in order to
increase affordability. Also, the company is flooded with a
number of sizeable contracts. Northrop Grumman's total order
backlog as of Mar 31, 2013 stood at $39.4 billion. During the
first quarter, the company received new contracts worth $4.7
Going forward, the company offers a strong program portfolio
positioned to take advantage of focus areas in the defense space.
Although Northrop Grumman like its peers faces uncertainty
related to the defense budget, it seems to be immune to some
extent to the defense budget cuts. In fact, the President's
fiscal year 2014 budget supports some of Northrop's key programs.
For 2014, the proposed budget increased funding for Northrop's
E-2D Advanced Hawkeye by 25%, while 21 EA-18G Growlers funding
got a proposal for double financing in comparison to 2013.
Meanwhile funding for F-35 was re-affirmed, and programs like
SBIRS, Advanced EHF and the James Webb Space Telescope, Global
Hawk Block 30 and Block 40 operations were sufficiently funded.
Cybersecurity became a key investment area with funding
increasing by more than 20% to $4.7 billion.
Despite these positives, apprehension of defense cutbacks on
high-cost platform programs, over-exposure to the Department of
Defense budget, cost over-runs and reductions in the Afghanistan
and Iraq operations compel us to remain on the sidelines.
Stocks to Consider
Stocks worth considering in the space are
Erickson Air-Crane Inc.
Wesco Aircraft Holdings, Inc.
Alliant Techsystems Inc.
). While Erickson Air-Crane carries a Zacks Rank #1 (Strong Buy),
Wesco Aircraft and Alliant Techsystems hold a Zacks Rank #2