Northrop Grumman Hits 52-Week High on Solid ISR Prospect

Zacks Equity Research
Updated

On Mar 21, 2016, shares of Northrop Grumman Corp. NOC soared to a new 52-week high of $195.47. The stock pulled back a bit to end the trading session at $194.18. This defense major with a market cap of around $35.14 billion has seen its shares rise roughly 19.41% in the past one year as against a 2.68% decline for the S&P 500 over the same period.

What’s Driving Northrop Grumman Up?

The company has a strong presence in Air Force, Space & Cyber Security programs. Northrop’s product line is well positioned in high priority categories, such as defense electronics, unmanned aircraft and missile defense.

Northrop Grumman’s product innovation and focus on strengthening its Intelligence, Surveillance and Reconnaissance or ISR wing will help maintain a stable earnings stream in light of the changing needs of the defense landscape.

With rising security threats, the U.S. government has realized the need for ISR technologies and has thus shifted its emphasis to high-tech intelligence equipment. The FY2017 defense budget proposal put due emphasis on ISR. Northrop Grumman continues to see growth in its unmanned and space businesses.

Importantly, in Oct 2015, the company won a contract from the Department of Defense for the Long Range Strike Bomber (LRS-B), beating out a Boeing-Lockheed Martin team. The new B-21 bomber will replace Boeing's B-52s, which have been in operation since the 1950s. The Air Force plans to buy 80 to 100 of the new airplanes, and the contract could go up to $50 billion to $80 billion. The first airplanes are scheduled to enter service around 2025. With the win of the Long-Range Strike Bomber contract, the company’s revenue outlook should get a significant boost over the coming years, leading to a multiple expansion opportunity.

Northrop Grumman maintains a strong balance sheet and steady cash flow that offer substantial financial flexibility and a cushion for incremental dividends, ongoing share repurchases and earnings accretive acquisitions.

The company continued its cash deployment strategy through share buybacks. In 2015, it repurchased 19.3 million shares for $3.2 billion. With this, Northrop Grumman completed the 60 million share repurchase target announced in May 2013 and reduced its share count by approximately 10%. It boosted the quarterly dividend by 14% for a total payout of $603 million in 2015. Total shareholder return for the year was slightly over 30%.

Zacks Rank

Currently, Northrop Grumman holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Huntington Ingalls Industries Inc HII, Spirit AeroSystems Holdings, Inc. SPR and AeroVironment, Inc. AVAV, all carrying a Zacks Rank #2 (Buy).

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