Northrop Grumman Corp (NYSE:NOC)

unmanned systems

good fundamentals, strong profitability, cheap on sustainable free cash flow basis

Buying defense as a hedge against Iran.

Army is retooling.

Good entry.

12/10

Large Cap stock trading above their 14-day SMA

In the short run the stock is at its year low; so I would expect some short term capital gains; but the administration is cutting the defense budget by 50% or more. NOC relies on government contracts heavily, so in the long term this may not be a good play.

Diversified company. Intelligent leadership. An industry I see expanding.

Government cutbacks will hurt defense contractors over the next few years as governments deal with fiscal austerity and winding down overseas deployments.

Big defense contractor with leading market position. Spinning off low-margin shipbuilding business that has been depressing overall earnings. Through the spin-off, NOC will be able to unload a significant amount of debt on the shipbuilder, and allow it to focus on its higher margin businesses. An additional kicker can be found in the proposed spin-off. It looks like the shipbuilding business will have significant leverage. Additionally, the business’ margins have been substantially decreased by difficulties in the gulf coast. The company has decided to close one of the shipyards by 2013. The high leverage creates an opportunity in that any operating improvements will be amplified in earning growth. It appears management will have a considerable stake in the new entity and long-term incentives. The proposed CEO, Mike Petters, has an outstanding track record, as well as a reputation for frugality. Here is a good article on him: (http://articles.dailypress.com/2011-01-09/business/dp-nws-cp-mike-petters-northrop-20110109_1_shipbuilding-enterprise-matt-mulherin-shipyard). Long NOC now, but looking to pick up shares of the spin-off at a bargain post distribution.

Here's the rec:
http://www.fool.com/investing/value/2011/01/05/rising-stars-buy-cheap-defense-stocks.aspx?source=ihpsitota0000001&lidx=8

wars?

Best of Breed of defense contractors, who have been significantly discounted due to fears of government budgetary pressures and the wars winding down. However, this industry is likely to not only survive cuts by traditionally hawkish conservatives, but is likely to thrive due to increased exports from a cheap dollar and continued security concerns abroad.
NOC offers a solid dividend, and its dominant position in the UAV market offers it much stronger growth prospects relative to its industry peers.
A near term catalyst would be NOC's intention to spin-off its mature, lower margin ship-building operations, which would allow the company to focus its efforts in more profitable areas.

This stock qualifies for my high stable dividends screen, which typically outperforms the S&P 500 by more than 10% per year. The idea of the screen is to look for stocks that meet the following criteria: (1) dividend yields above 2% (2) stock seems undervalued and (3) dividend appears to be sustainable or growing. I think that Mr. Market will reward this type of stock in the near future as investors flee bonds in search of higher yields. Stable stocks should look appealing given the uncertain economic future for developed economies. The current dividend yield of Northrop Grummon is about 3.1%. Current ROE is 14% and the stock is trading for just 9 times expected earnings. The current payout ratio is 0.3 and the five year average payout ratio is 0.3

Northrop Grumman is moving toward their customer and aligning its business toward more of a profit orientation. They are strategically aligned to capture more business in areas that the Defense Department is buying.

NOC will spin off less profitable businesses.

B

Profile
Northrop Grumman Corporation
1840 Century Park East
Los Angeles, CA 90067-2199
United States - Map
Phone: 310-553-6262
Fax: 310-553-2076
Website: www.northropgrumman.com

Details
Index Membership: S&P 500
S&P 1500 Super Comp
Sector: Industrial Goods
Industry: Aerospace/Defense Products & Services
Full Time Employees: 120,700

Business Summary
Northrop Grumman Corporation provides products, services, and integrated solutions in the aerospace, electronics, information and services, and shipbuilding sectors. The company?s Aerospace Systems segment offers manned and unmanned aircraft, spacecraft, high-energy laser systems, microelectronics, and other systems and subsystems in the areas of intelligence, surveillance, and reconnaissance; communications; battle management; strike operations; electronic warfare; missile defense; earth observation; space science; and space exploration. Its Electronic Systems segment provides various electronic and maritime systems for national security and non-defense applications, such as airborne surveillance, aircraft fire control, precision targeting, electronic warfare, automatic test equipment, inertial navigation, integrated avionics, space sensing, intelligence processing, air and missile defense, communications, mail processing, biochemical detection, ship bridge control, and shipboard components. The company?s Information Systems segment focuses on the fields of command, control, communications, computers, and intelligence; air and missile defense; airborne reconnaissance; intelligence processing; decision support systems; cybersecurity; information technology; and systems engineering and integration. It serves Department of Defense, national intelligence, federal civilian, state and local agencies, and commercial customers. Northrop?s Shipbuilding segment designs, builds, and refuels nuclear-powered aircraft carriers and nuclear-powered submarines for the U.S. Navy. It also acts as a service systems provider for the design, engineering, construction, and life cycle support of surface ships for the U.S. Navy, the U.S. Coast Guard, and international navies. The company?s Technical Services segment provides logistics, infrastructure, and sustainment support, as well as training and simulation services. Northrop was founded in 1939 and is based in Los Angeles, California.

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