We have maintained our Neutral recommendation on Northrop Grumman Corp. (NOC) on Aug 26, 2013, based on strong second quarter earnings, steady flow of contracts and efficient cash deployment strategy. Our view was partly tempered by delayed funding authorizations.
Why the Reiteration?
Northrop Grumman has a strong presence in Air Force, Space & Cyber Security programs. Last month, the company posted strong second quarter results on the back of a lower share count and a strong operating performance.
Revenue and earnings growth continued to be driven by its strong presence in the current focus areas of cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance systems, advanced electronics and software development.
The company has indicated that though the budget environment is unpredictable, it will continue to focus on aligning the portfolio with the priority areas of investment for global security.
Northrop Grumman is taking several initiatives to ensure further alignment with its customers' needs in order to increase affordability and cost competitiveness. While the company’s Global Hawk program is maturing, the company continues to progress well on other unmanned programs, such as Alliance Ground Surveillance and Fire Scout program.
Despite the positives, we remain concerned about the defense cutbacks on high-cost platform programs, a declining order backlog, over-exposure to the Department of Defense budget, cost over-runs and reductions in the Afghanistan and Iraq operations, and high exposure to fixed price contracts.
Other Stocks to Consider
Northrop Grumman presently retains a Zacks Rank #2 (Buy). Other stocks worth considering in the space are Alliant Techsystems Inc. (ATK), Lockheed Martin Corp. (LMT) and Huntington Ingalls Industries, Inc. (HII). While Alliant Techsystems carries a Zacks Rank #1 (Strong Buy), Lockheed Martin and Huntington Ingalls hold a Zacks Rank #2 (Buy).
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