In anticipation of delay in receiving government contracts, Northrop Grumman Corp. (NOC) has issued Worker Adjustment and Retraining Notifications (WARN) to 59 employees. The WARN notice was issued to the employees serving in Northrop Grumman’s Hagerstown Maintenance and Modification Center, Maryland facility. 

Northrop is issuing the WARN notice to its employees as per the requirement of the WARN Act, which requires companies to provide advance notice to employees in the event of impending large layoffs. 

The employees from the Hagerstown Maintenance and Modification Center, Maryland facility, were issued WARN notice for the second time in 2010. Earlier, in March 2010, the company issued a WARN notice to 180 employees from this facility. Northrop is left with no additional work to allocate to the laid off workers and expects to receive new orders from the government not earlier than fall 2010. 

Given Pentagon’s decision to trim its defense expenditure by $100 billion during the next five years, we believe it will definitely have an adverse impact on the future prospects of defense contractors. 

The adjusted earnings of Northrop Grumman at the end of first-quarter 2010 were $1.53 compared with $1.17 at the end of first-quarter 2009. The actual results of the quarter were 21 cents higher than the Zacks Consensus Estimate of $1.32. The company expects earnings for 2010 to be in the range of $5.75 to $6.00 per share. The Zacks Consensus Estimate for second-quarter of 2010 is $1.47 per share, for 2010 it is $6.01 per share, and for 2011 it is $6.90 per share. 

The positive catalysts for Northrop Grumman are diversified revenue and earnings streams with strong growth and discounted relative valuation metrics. We currently maintain our Neutral rating and Zacks Rank #3 on Northrop Grumman, as these positive factors would be offset by a lower backlog and a substantial exposure to missile-defense-related programs despite the continuous effort by the company to trim costs. The major competitors of the company are Boeing Co. (BA), General Dynamics Corp. (GD) and Lockheed Martin Corp. (LMT).
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