Northrop Grumman Corporation (NOC) was awarded a fixed price contract valued at $25 million by the US Navy for the preparation and completion of a dry dock continuous maintenance availability of submarine USS Albany. The work is expected to be completed by the end of July 2011.
Northrop Grumman’s Shipbuilding sector is the prime contractor and will provide advance planning, design, engineering, procurement, ship-checks, fabrication and preliminary shipyard work.
Northrop Grumman is planning to spin off its shipbuilding business. Earlier this week the Board of Directors approved the spin-off of its shipbuilding business. Management believes this would allow both the company and the Shipbuilding unit to more effectively pursue their respective opportunities and maximize long-term value. The spin-off is however subject to clearance from the U.S. Securities and Exchange Commission.
In July 2010, Northrop Grumman had announced initial plans of separation of the Shipbuilding segment and in November 2010 had suggested that the spun off unit would be christened Huntington Ingalls Industries Inc. The new company would be listed in NYSE Euronext Inc. (NYX) managed New York Stock Exchange (NYSE) under the ticker symbol ‘HII’.
Huntington Ingalls common stock is expected to conditionally begin trading “when issued” under the symbol “HII WI” beginning on March 22, 2011.
On March 31, 2011, Northrop Grumman will pay a pro rata dividend of Huntington Ingalls common stock to its stockholders of record as on March 30, 2011. Northrop Grumman stockholders will receive one share of Huntington Ingalls for every six shares of Northrop Grumman common stock they hold. However, no fractional shares of HII common stock will be distributed. They will be aggregated and sold in the open market.
Subsequently from March 31, 2011, the distribution date, “HII WI” trading will end and “regular-way” trading under the symbol HII will begin.
We believe that Northrop Grumman is fundamentally a sound company and has a strong market position, but we are cautious about near-term bumps. The company currently is trading at a discount to both the peer group and the S&P 500, based on forward earnings estimates.
Northrop’s product line is well positioned in high priority categories, such as defense electronics, next-generation ships, unmanned aircraft and missile defense. Revenue and earnings growth continues to be driven by its strong presence in the cyber security, intelligence, surveillance and reconnaissance market.
However, we believe all the above positives have already been taken into account. Currently the stock is moving laterally due to the absence of any positive cues. We believe the trend would continue in the near term and thus retain a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) on the stock. We are also maintaining our long-term Neutral recommendation on the stock.
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