We have maintained our Neutral recommendation on Northrop Grumman Corporation (NOC - Analyst Report). The company currently has a Zacks Rank #3 (Hold).
Why the Reiteration?
Northrop Grumman has a strong presence in Air Force, Space & Cyber Security programs. Its product line is well positioned in areas like defense electronics, unmanned aircraft and missile defense. With the successful spin-off of its Shipbuilding business in Mar 2011, Northrop Grumman’s revenue base is heavily skewed towards programs with a short business cycle. Moreover, the spin-off has contributed $1.4 billion to the company.
The positive case for Northrop Grumman stems from revenue growth across the board, a broad diversification of programs, and an order backlog of approximately $40.8 billion at the end of 2012. Revenue and earnings growth continue to be driven by its strong presence in cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance systems, advanced electronics and software development.
Also, Northrop Grumman’s strong balance sheet and cash flows provide substantial financial flexibility and a cushion through an incremental dividend, ongoing share repurchases and earnings accretive acquisitions.
However, these positives are offset by apprehension regarding defense cutbacks on high-cost platform programs, over-exposure to the Department of Defense (DoD) budget, lower backlog, cost over-runs and reductions in Afghanistan and Iraq operations.
Other Stocks to Consider
Other stocks worth considering are The Boeing Company (BA - Analyst Report), Lockheed Martin Corporation (LMT - Analyst Report) and Rockwell Collins Inc. (COL - Analyst Report), all with a Zacks Rank #2 (Buy).