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On Apr 5, 2013, shares of Northrop Grumman Corporation (NOC - Analyst Report) hit a 52-week high of $71.56. Previously, the company had reported solid fourth-quarter results with a positive earnings surprise of 18.39%. Northrop witnessed positive earnings surprises in all the 4 quarters of 2012, with an average beat of 12.39%.

Operational efficiency, huge number of contracts, solid liquidity position and effective cash deployment strategy has led Northrop’s share to attain this new high.

Northrop is a well-managed defense prime. Its inventory turnover of 26.78 times in the trailing twelve months at the end of 2012, compared to only 3.01 times for the Zacks industry average, represents a strong sign of operational efficiency. In addition, Northrop’s operational effectiveness is evident in its industry-high Return on Investment (ROI) of 13.2% in 2012. As of Dec 31, 2012, the current ratio was 1.385 compared to 1.263 as of Dec 31, 2011.

Also, the company is flooded with a number of sizeable contracts. Total backlog at the end of 2012 was $40.8 billion versus $39.5 billion at the end of 2011. Moreover, the company is progressing well on its research and development. In 2012, the company incurred independent research and development expenses of $520 million.

Recently, the company announced that it has introduced the Fourth Generation Tracking Adjunct Sensor for its Hawk air defense system. The new 4G TAS offers passive electro-optical/infrared (EO/IR) initiating, tracking and investigating competence to Hawk.

Northrop holds a good liquidity position. The company continues to be a strong cash generator with its operating cash flow reaching approximately $2.6 billion during 2012. Cash and cash equivalents at the end of 2012 were $3.9 billion, up from $3 billion at the end of 2011.

Also, Northrop has an effective cash deployment strategy. In Sep 2012, the board of directors increased the company's outstanding share repurchase authorization to $2 billion of common stock. In 2012, the company deployed $1.3 billion to repurchase 20.9 million shares.

Besides share buybacks, Northrop deploys cash by paying regular dividends. In May 2012, the company increased its annual dividend for the ninth consecutive time, bringing the annualized payout to $2.20 per share from $2 per share earlier. With the current price of $71.56, the company generates a dividend yield of 3.07%.

We expect the incremental dividend and expanded share buybacks to make the stock more attractive for investors. Also, the company’s sound liquidity position will allow the company to fulfill its future financial commitments. Going forward, the company offers a strong program portfolio positioned to take advantage of focus areas in the defense space, an improving balance sheet and an ongoing share repurchase program.

Northrop currently carries a Zacks Rank #3 (Hold). Other stocks to consider are Wesco Aircraft Holdings, Inc. (WAIR - Snapshot Report), Alliant Techsystems Inc. (ATK - Analyst Report) and FLIR Systems, Inc. (FLIR - Analyst Report). While FLIR Systems carries a Zacks Rank #1 (Strong Buy), Wesco Aircraft Holdings and Alliant Techsystems hold a Zacks Rank #2 (Buy).

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