Northrop's Buyback Plan on Track, Should You Stay Invested?
On Sep 2, 2014, we issued an updated research report on Northrop Grumman Corp. (NOC). Shares of this defense major have gained 11.9% so far this year, outperforming the 9.1% gain of the S&P 500 over the same period.
Although the company’s earnings missed the Street expectation in the second quarter 2014, its revenues beat the same. Nevertheless, reported earnings improved from the prior year due to a decline in total operating cost and expenses while revenues were down 4.1% year over year. Bolstered by a solid first-half 2014 performance and a modestly better segment margins outlook, Northrop Grumman has increased the 2014 earnings guidance to $9.15–9.35 from $8.90–9.15.
Northrop Grumman’s strong balance sheet and steady cash flow position offer substantial financial flexibility and a cushion for an incremental dividend, ongoing share repurchases and earnings accretive acquisitions. The company continued its cash deployment strategy through share buybacks, repurchasing 6.1 million shares for $741.0 million during the last reported quarter.
Free cash flow remained strong, increasing 62.9% year over year, despite higher capital expenditure (up 141.7% year over year) during the second quarter of 2014. The company remains on track to repurchase 25% of its shares by the end of 2015 having bought back 31.7 million of the planned 60 million shares to date.
The robust cash generation capability has also allowed Northrop Grumman to pay consistent dividends to its shareholders. In May 2014, it hiked its quarterly dividend by 15% to 70 cents per share from 61 cents per share. This marked the 11th consecutive dividend increase by the company, leading to a dividend yield of 2.20%, higher than the industry average of 1.4% with respect to the current market price.
Again, Northrop Grumman is effectively battling the current sequestration wave thanks to its diversified business mix and strategic acquisitions. With rising security tensions in the Middle East, foreign military sales could prove to be the key performance catalyst for the company.
The company’s international sales increased 20% in 2013 and will likely represent 13% of revenues in 2014. This could trigger 20%–25% annualized growth in international sales in 2014, considering the mid-point of the company’s guided range. Going forward, the Qantas Defense Unit acquisition is also expected to play an important role in Northrop Grumman’s international growth in its specialized areas of unmanned, C4ISR, cyber, and logistics and modernization.
Having said so, a plummeting order backlog and the ramp-down of military programs remain major concerns.
Key Picks in the Sector
Northrop Grumman presently holds a Zacks Rank #2 (Buy). Other well-ranked defense stocks worth considering are Air Industries Group (AIRI), The Boeing Co. (BA) and General Dynamics Corp. (GD). Air Industries sports a Zacks Rank #1 (Strong By), while Boeing and General Dynamics hold the same rank as Northrop Grumman.
Read the Full Research Report on NOC
Read the Full Research Report on BA
Read the Full Research Report on GD
Read the Full Research Report on AIRI
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