On Nov 21, 2014, we issued an updated research report on Northrop Grumman Corp. (NOC). This Zacks Rank #3 (Buy) stock reported a positive 7.41% earnings surprise in the last quarter. It hit a 52-week high of $142.31 on Nov 25 and its share price has rallied 23.4% so far this year, outperforming the 12.1% gain of the S&P 500 over the same period.
Northrop Grumman’s third-quarter 2014 earnings improved 17.8% to $2.32 per share from $1.97 per share in the year-ago quarter. Earnings also surpassed the Zacks Consensus Estimate by 7.4% – a feat no less commendable given the severe pressure on the U.S. military budget.
Based on its strong performance, the company boosted the 2014 guidance, which assumes a segment margin in the high 12% range. Notwithstanding the pension headwind from the HATFA legislation, Northrop expects 2014 sales to be on the higher end of its prior guided range while raising its targeted earnings per share range to $9.40–$9.50 from $9.15–9.35.
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 Northrop. The company’s international sales increased 20% in 2013 to $2.5 billion and will likely represent 13% of revenues in 2014, up from 10% in 2013. This could trigger 20%–25% annualized growth in international sales in 2014, considering the mid-point of the company’s guided range.
The company also continued its cash deployment strategy through share buybacks. Northrop bought back 6.0 million shares for $753.0 million during the third quarter, bringing its year-to-date repurchase to 37.7 million shares.
The company has by now achieved over 60% of its 60 million share repurchase target for end 2015. The company anticipates strong cash flow in the fourth quarter and has maintained its guidance for both operating and free cash flow for the year. The robust cash generation capability has allowed Northrop to pay dividends consistently to its shareholders.
However, its top line continues to suffer from sequestration just like the other defense players, Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD) and The Boeing Co. (BA). The company’s revenues declined year over year in the third quarter. Although the company now expects 2014 sales to be on the higher end of its earlier guided range of $23.5 billion to $23.8 billion, it still reflects a low single-digit year-over-year decline.
In the end, the company’s product innovation and diversified business operations will help maintain a stable earnings stream.
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