Northrop Gets C-RAM Task Order - Analyst Blog

Los Angeles-based leading shipbuilder and defense contractor Northrop Grumman Corporation (NOC) has received a $68 million contract from the Scott Air Force Base, Illinois based Defense Information Systems Agency. The company would provide personnel for operating Counter-Rocket, Artillery and Mortar (C-RAM) systems at forward operating bases in Afghanistan supporting Operation Enduring Freedom. The task order has a total potential value of $219 million collectively over a period of three years.

The contract will boost Northrop Grumman’s Defense Systems business part of its Information Systems segment. The segment provides information technology (IT) systems engineering and systems integration solutions for the Department of Defense, national intelligence, federal civilian, state and local agencies, and commercial customers. Products and services are focused on the fields of command, control, communications, computers and intelligence; air and missile defense; airborne reconnaissance; intelligence processing; decision support systems; cybersecurity; information technology; and systems engineering and systems integration. 

In the second quarter of 2010, Information Systems sales of $2.1 billion were 1.3% lower than the year-ago period, principally due to lower volume for civil systems and intelligence programs, which more than offset higher volume for defense programs. Information Systems operating income increased 26% and based on sales totaled 9.7% compared with 7.6% in the prior-year period.  Higher operating income and rate reflect improved performance across several programs as well as risk retirement of $18 million related to a subcontractor on the New York City Wireless program; these items more than offset lower volume.

Northrop Grumman provides products, services and solutions in information and services, aerospace, electronics and shipbuilding to the military, government and commercial customers in the United States and beyond. 

Northrop Grumman’s success in the competitive defense industry depends upon its ability to develop and market its defense-related products and services to the U.S. Government, as well as its ability to provide people, technologies, facilities, equipment and financial capacity needed to deliver those products and services at maximum efficiency. 

We believe that Northrop Grumman is fundamentally a sound company and has a strong market position, but we are cautious about near-term bumps. The company currently is trading at a discount to both the peer group and the S&P 500, based on forward earnings estimates. 

Northrop Grumman currently has a dividend yield of 3.5%. This is higher compared to other large cap defense companies like, Empresa Brasileira de Aeronáutica S.A. (ERJ) and Boeing Company (BA), who have yields of 0.7% and 2.8%, respectively.

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 continue to be driven by its strong presence in the current focus areas of cyber security, intelligence, surveillance and reconnaissance. 

However, we believe all the above positives have already been taken into account. Over the past month, the stock was down approximately 7.7% attributable to a breather in the absence of any positive trigger. We believe the stock would move sideways in the near-term and 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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