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Northrop Grumman Corporation (NOC): Is It A Buy?

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While I may not be convinced of Northrop Grumman Corporation (NYSE:NOC)‘s superiority in the realm of robotics, I have to admit the defense giant deserves a small round of applause after posting better-than-expected earnings earlier this week.

Earnings Analysis: Northrop Grumman Corp. (NYSE:NOC)The numbers
Sure enough, shares of Northrop Grumman Corporation (NYSE:NOC) rose more than 3% Wednesday after the company achieved $6.1 billion in sales. All in all, that was good for net earnings for the quarter of $489 million, or $2.03 per diluted share. Analysts polled by S&P Capital IQ were looking for sales of $5.96 billion and a net profit of $1.71 per share.

While both revenue and earnings were down year over year from $6.2 billion and $506 million, respectively, note that first-quarter 2013 earnings were actually higher on a per-share basis thanks largely to Northrop Grumman Corporation (NYSE:NOC)’s spending an eye-popping $456 million over the past three months to repurchase 6.5 million of its own shares. That reduced the total number of shares outstanding by around 7%. What’s more, approximately $1 billion still remains available in the company’s current share-repurchase authorization for future buybacks.

Aerospace Systems remained Northrop Grumman Corporation (NYSE:NOC)’s primary avenue for growth thanks to higher volume for both manned and unmanned aircraft programs; the segment’s sales rose $102 million year over year to $2.485 billion. Because of lower overall segment operating incomes, however, operating margin fell 40 basis points to a still-respectable 12.4%.

Northrop Grumman Eurohawk, Northrop stock

Northrop Grumman Eurohawk unmanned aircraft, Image source: Northrop Grumman

Finally, first-quarter 2013 free cash flow came in at a negative $39 million, but that’s a vast improvement over negative free cash flow of $186 million in the first three months of 2012. In the end, FCF this quarter was helped by a $41 million decline in capital spending and a $106 million improvement in cash from operations to $1 million.

What’s next?
Despite the tough environment in defense spending, Northrop Grumman Corporation (NYSE:NOC) management felt comfortable providing 2013 revenue guidance of $24 billion, at the same time warning that operating margin should continue to decline slightly to high 10% to low 11% range. In all, that should be good for diluted earnings per share between $6.85 and $7.15.

On the earnings conference call, Northrop Grumman Corporation (NYSE:NOC) CEO Wes Bush also reiterated that Northrop is “continuing to close and consolidate facilities across the company” with the aim of “improving [their] cost competitiveness by reducing [their] facility’s footprint and levering [their] enterprisewide capacity in the most efficient and cost-effective manner.”

Translation? Northrop is still cutting costs with the aim of making themselves as competitive as possible as government budgets continue to tighten — a good thing, considering Northrop will surely be competing for much of the same funding as other defense titans like Lockheed Martin Corporation (NYSE:LMT), Raytheon Company (NYSE:RTN), and Textron Inc. (NYSE:TXT), all of whom offer their very own unique sets of unmanned aerial vehicles to compete with Northrop’s designs.

Foolish final thoughts
So what’s an investor to do? After all, all three of these competitors look fairly cheap on a trailing price to earnings basis; Textron Inc. (NYSE:TXT) trades hands for just 13 times trailing earnings, while the P/E ratios of Lockheed Martin Corporation (NYSE:LMT) and Raytheon Company (NYSE:RTN) sit even lower at 11.4 and 10.7, respectively.

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