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Analyst Blog

On Aug 22, 2014, shares of Northrop Grumman Corp. soared to a new 52-week high of $128.66, finally ending the trading session a little lower at $127.60. This defense prime with a market cap of around $26.53 billion has seen its shares rise roughly 11.3% so far this year, outperforming the 7.6% gain of the S&P 500 over the same period.

What’s Driving Northrop Grumman Up?

Northrop Grumman reported higher profits in the second quarter despite missing analyst expectations. The company also raised its earnings guidance for the year to a band of $9.15–$9.35 per share from the earlier $8.90–$9.15 per share, with international sales expected to reach 13% of total sales, up from 10% in 2013. The growth will likely come from unmanned aerial vehicles and cybersecurity work.

The company posted a 3.03% average positive earnings surprise over the last four quarters. Northrop exited the second quarter with a multi-year contract worth $3.6 billion from the U.S. Navy to supply 25 E-2D Advanced Hawkeye aircraft. In a nutshell, a steady flow of contracts including substantial international orders, a funded backlog of $35.55 billion as of Jun 30, 2014, the introduction of several new products and the commitment to return wealth to its shareholders make this stock rather attractive.

This defense major continues to enhance its shareholder value through systematic share buybacks and regular dividend payments. In the second quarter, the company repurchased 6.1 million shares worth $741 million. Northrop still has 28.3 million shares to be repurchased under its 60 million share repurchase authorization, which expires by the end of 2015.

The expected long-term earnings growth rate of the company is set at 7.6% and the Zacks Consensus Estimate for 2014 reflects an estimated 19.3% jump to $9.40 from $7.88 earned in 2013. For 2015, the bottom line is expected to witness 6.5% year-over-year growth. The forward price/earnings (P/E) multiple of 13.6 is lower than the peer group average of 17.0, reflecting a discount of 20%.

Northrop Grumman is a Zacks Rank #2 (Buy) stock. Other companies in the defense space worth considering include Air Industries Group , The Boeing Co. and General Dynamics Corp. . Air Industries carries a Zacks Rank #1 (Strong By), while Boeing and General Dynamics hold the same rank as Northrop Grumman.

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