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Northrop Grumman $1B Richer

NOC LMT

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A team led by Northrop Grumman Corporation (NOC - Analyst Report) was awarded a follow-on task order of a total potential value of $1.1 billion by the U.S. General Services Administration (GSA). Per the order the team led by Northrop will operate, maintain and enhance the classified networks for the U.S. Department of Homeland Security.

Northrop Grumman's team includes, among others, Lockheed Martin Corporation (LMT - Analyst Report), Audio Video Systems and BruinWave Solutions. Work on the order will be conducted over a one-year base period with six one-year option periods.

Northrop Grumman was awarded the original task order to build and operate the department's secret classified network infrastructure in 2004.

Northrop Grumman's Information Systems segment will lead the work to sustain and modernize classified enterprise information technology services for the Department of Homeland Security. In the recently reported fiscal 2010 results, the Information Systems segmental revenue decreased 2% year over year to $8.4 billion.

Northrop Grumman’s total order backlog at the end of fiscal 2010 stood at $64.2 billion compared with $69.2 billion at fiscal-end 2009. The company expects its revenue for fiscal 2011 to about $27.5 billion and earnings per share (EPS) to be in the range of $6.40–$6.60. The Zacks Consensus Estimates for the first quarter 2011, fiscal year 2011 and fiscal year 2012 currently stand at $1.67 per share, $7.07 per share and $7.53 per share, respectively.

Los Angeles-based Northrop Grumman Corporation is one of the world’s leading shipbuilders and the second largest defense contractor in the U.S. The company supplies a broad array of products and services to the U.S. Department of Defense (DoD), including electronic systems, information technology, submarines and surface ships, aircraft, space technology and systems integration services.

We believe that Northrop Grumman is fundamentally a sound company and has a strong market position, but we are cautious about near-term bumps. Northrop’s product line is well positioned in high priority categories, such as defense electronics, next-generation ships, unmanned aircraft and missile defense.

Revenue and earnings growth continues to be driven by its strong presence in the cyber security, intelligence, surveillance and reconnaissance market.

However, we believe all the above positives have already been taken into account. Currently the stock is moving laterally due to the absence of any positive cues. We believe the trend would continue in the near term and thus retain a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) on the stock. We are also maintaining our long-term Neutral recommendation on the stock.

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