Northrop Grumman (NOC)
is stuck between a rock and a hard place, with defense spending falling as U.S. military conflicts wind down and upcoming automatic cuts to defense budgets under existing law. While designed to reduce the federal deficit, cuts to such spending promises to hit defense contractors hard.
Northrop Grumman provides aerospace, electronics, information and services solutions to global customers. It participates in many high-priority defense and government services technology programs in the United States and abroad as a prime contractor, principal subcontractor, partner, or preferred supplier.
NOC conducts most of its business with the U.S. government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign governments and domestic and international commercial customers.
NOC is currently aligned into four operating segments: Aerospace Systems, Electronic Systems, Information Systems, and Technical Services.
The primary obstacle to growth, NOC management warns, is the coming so-called “fiscal cliff” from legislation in place that could cut more than $1 trillion from the federal budget automatically, half of that from defense budgets, through a process known as sequestration..
“Deficit reduction is a critical national priority. We expect a significant amount of debate and dialogue regarding how the defense budgets will be impacted by deficit-reduction actions. While the outcome of that debate remains uncertain, we are formulating contingency plans for the possibility of sequestration occurring in January 2013,” said Northrop Chairman and CEO Wesley Bush in a call with analysts.
“I want to be clear that the implementation of sequestration, as presently mandated, could have a very serious negative impact on our company, our industry, and of course, on the defense capacity of our nation.”
Northrop Grumman has a market cap of $15.63 billion in a sector, aerospace and defense, where the average company size is $5.56 billion. Its trailing 12-month P/E ratio is 8.05 and its five-year projected price-to-earnings-growth (PEG) ratio is 160.96, compared to 8.52 for the sector.
Its projected earnings per share growth for the coming year is 1.45 percent, compared to a sector average of 15.88 percent.
Wall Street is generally positive on NOC, with buy or outperform calls from Citigroup Investment Research, Morgan, Keegan & Company, Jefferies, and Jefferson Research & Management.
Merrill Lynch rates the stock at underperform.
“Defense spending is the major source of revenue for the top nine global aerospace and defense companies, with the U.S. accounting for more than 40 percent of total global defense spending,” wrote the analysts at Zacks Investment Research in a report on the sector.
“However, with the U.S. government expected to institute greater austerity in its defense budget going forward, defense companies will need to source more orders from global clients. The geostrategic significance of the industry and the related heavy export restrictions will come in the way, to some extent, of those marketing efforts by U.S.-based operators,” such as Lockheed Martin (LMT)
, General Dynamics (GD)
, and Raytheon (RTN)
Northrop Grumman next reports on July 25.
© 2013 Moneynews. All rights reserved.