We maintain our Neutral recommendation on Northrop Grumman Corporation ( NOC ), which is the third largest defense contractor behind The Boeing Company ( BA ) and Lockheed Martin Corporation ( LMT ) in the U.S. in terms of trailing twelve-month sales. Northrop's fortunes are heavily tied to missile defense-related programs and we caution that these programs are tempting targets in order to reduce the budget deficit.
Northrop Grumman supplies a broad array of products and services to the U.S. Department of Defense. Its revenue and earnings growth are fortunately driven by its strong presence in the current focus areas of cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance ( ISR ) systems, advanced electronics and software development.
Among other positives are the company's strong balance sheet and cash flows that provide substantial financial flexibility through an incremental dividend, ongoing share repurchases and earnings accretive acquisitions. Moreover, with the successful spin-off of its Shipbuilding business in March 2011, Northrop Grumman's revenue base is heavily skewed towards programs with a short business cycle.
Despite the positives, the company has to face budget deficits and political uncertainty that make future U.S. defense budgets vulnerable to cutbacks. Additionally, due to a lower backlog, cost over-runs and reductions in Afghanistan and Iraq operations, accompanied with a lack of near-term catalysts, we retain a cautious stance on the company.
We also believe that failure to renew the revolving credit facility, scheduled to expire in September 2012, could pose a short-term liquidity crisis for the company. Northrop uses its credit facilities to meet short-term and working capital needs.
The company expects earnings per diluted share in a range of $6.95 to $7.05 for fiscal 2011 taking into account higher segment operating margin and total operating margin, aided by a lower number of weighted average shares outstanding.
The Zacks Consensus Estimates for fourth quarter 2011 and fiscal year 2011 are currently at $1.69 per share and $7.02 per share, respectively. The company presently retains a short-term Zacks #3 Rank (Hold).