Shares of Northrop Grumman Corp. NOC scaled a new 52-week high of $177.78 on Oct 12, finally closing the trading session a little lower at $177.19. With a market cap of around $33.20 billion, the defense prime has seen its shares soar roughly 42.68% in the past one year, outperforming the 7.44% gain of the S&P 500 over the same period.
What’s Driving Northrop Grumman?
As domestic contracts continue to see a downward trend, foreign military sales or FMS are providing the much needed respite and acting as a key performance catalyst for Northrop. The company’s international contracts comprised about 14% of the backlog at the end of 2014. The company expects international sales to increase by about 15% in 2015 as it continues to witness strong demand for its products on a global scale with established programs like F-35 and E-2D, Triton, and SABR radar, as well as a robust set of new programs.
Northrop Grumman has a diversified business mix to help it counter budget constraints in the aerospace and defense industry effectively. In response to asymmetric terrorist threats, the emphasis appears to have shifted to high-tech intelligence equipment, replacing demand for conventional big guns and heavy armor. Defense companies will increasingly be required to come up with more sophisticated intelligence, surveillance and reconnaissance (“ISR”) technologies.
To that extent, Northrop announced a restructuring of its business to focus on its space and airborne ISR business. It is also the proud owner of Global Hawk, an unmanned system with the ability to transform itself into an operational weapons system when required. Its timely shift in focus toward ISR technologies will allow the company to witness significant gains, going forward. Recently, Northrop won an indefinite-delivery/indefinite-quantity contract from the U.S. Air Force for the Global Hawk unmanned surveillance plane, worth $3.2 billion.
Again, Northrop’s strong balance sheet and steady cash flow position offer substantial financial flexibility and scope for incremental dividends, ongoing share repurchases and earnings accretive acquisitions. Last month, its board of directors authorized the repurchase of an additional $4 billion worth of shares as part of a new buyback authorization. The company is on track to complete its 60 million share repurchase target this year. Its robust cash generation capability allows Northrop to fund capital investment programs and sustain shareholder friendly moves.
Zacks Rank
Northrop Grumman is a Zacks Rank #2 (Buy) stock. Some of the other companies in the defense space worth considering include Lockheed Martin Corp. LMT, General Dynamics Corp. GD and Huntington Ingalls Industries, Inc. HII, all with a Zacks Rank #2.
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