Shipbuilder and defense contractor Northrop Grumman Corp. (NOC) won a $457 million contract from the U.S. Defense Department to provide radar equipment for aircraft pilots. Work on the contract will be done in Rolling Meadows, Illinois and is expected to be completed by 2014.
Northrop Grumman provides products, services and solutions in information and services, aerospace, electronics and shipbuilding to the military, government and commercial customers in the United States and beyond.
The company’s success in the competitive defense industry depends upon its ability to develop and market its defense-related products and services to the U.S. government, as well as its ability to provide people, technologies, facilities, equipment and financial capacity needed to deliver those products and services at maximum efficiency.
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.
The adjusted earnings of Northrop at the end of second quarter stood at $2.34 per share versus $1.21 at the end of second quarter of 2009. The Zacks Consensus Estimate for the third quarter, fiscal 2010 and fiscal 2011 are $1.46 per share, $6.83 per share and $6.80 per share, respectively.
The positive stand for Northrop Grumman stems from revenue growth across the board, broad diversification of programs, strong order bookings and an order backlog of $66 billion at the end of the first half of 2010.
Northrop Grumman currently has a dividend yield of 3.3%. This is higher compared to other large cap defense companies like Empresa Brasileira de Aeronáutica S.A. (ERJ) and The Boeing Co. (BA) who have yields of 0.7% and 2.6%, respectively.
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 continue to be driven by its strong presence in the current focus areas of cyber security, intelligence, surveillance and reconnaissance.
However, we believe all the above positives have already been taken into account. Over the past week the stock was down approximately 6%. We believe the stock would move sideways in the near-term and 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.
