Northrop Grumman Corporation (NOC) was awarded a $108 million contract by the U.S. Air Force to upgrade its fleet of B-2 stealth bombers. There are 20 B-2s in the U.S. fleet, with 19 at Whiteman Air Force Base in Missouri and 1 used for flight testing at Edwards Air Force Base in California. The contract covers new software and hardware that increases the processing power of the plane, creating a more advanced communications suite.
While Northrop is the prime contractor for installation, the parts for the upgrade were designed with a number of partners. The upgrade will include a processing unit designed by Lockheed Martin Corporation (LMT) and a disk drive unit developed by Honeywell International Inc. (HON). To support the new processing units, Northrop is also installing a network of fiber-optic cables inside the bomber.
Going forward, Northrop Grumman’s strong balance sheet and cash flows provide substantial financial flexibility and a cushion for improving shareholder value through incremental dividend, ongoing share repurchases and earnings accretive acquisitions. In the second quarter of 2012, the company repurchased 4.9 million shares for approximately $295 million. At the end of the first half of 2012, the company had a low long-term debt-to-capitalization of 26.5%. Total long-term debt was approximately $3.9 billion, with no significant maturities in the near term, along with cash holdings of $3.1 billion.
Falls Church, Virginia-based Northrop Grumman Corporation is one of the largest defense contractors in the U.S. The company supplies a broad array of products and services to the U.S. Department of Defense including electronic systems, information technology, aircraft, space technology, and systems integration services. The positive case for Northrop Grumman stems from revenue growth across the board and a broad diversification of programs.
Northrop Grumman offers a strong program portfolio positioned to take advantage of focus areas in the defense space, an improving balance sheet and an ongoing share repurchase program. Also, its product line in high priority categories, such as defense electronics, unmanned aircraft and missile defense, gives Northrop Grumman an edge over competition.
Northrop Grumman’s backlog is expected to see further upside in the near future through unmanned aerial vehicle (:UAV) platforms, including Broad Area Maritime Surveillance (:BAMS), Fire Scout and Navy Unmanned Combat Air System (:UCA).
Going forward, Northrop Grumman offers a strong program portfolio positioned to take advantage of focus areas in the defense space, an improving balance sheet and an ongoing share repurchase program.
However, these are offset by apprehension regarding defense cutbacks on high-cost platform programs, over-exposure to the DoD budget, lower backlog, cost over-runs and reductions in Afghanistan and Iraq operations.
Like its peers, Embraer SA (ERJ) and General Dynamics Corporation (GD), the company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.
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