In the middle of May 2013, Northrop Grumman Corporation (NYSE:NOC) announced that it intended to repurchase as much as 25% of its total shares outstanding in the next two years. Charlie Munger often advises investors that one of the three things that make investors become successful is investing in cannibals (the companies that keep “eating” themselves. Thus, if Northrop repurchases its shares, its EPS will accelerate and the stock price will eventually follow. Should we consider Northrop as a good buy now? Let’s take a closer look.
U.S. Government accounts for most of its sales
Northrop Grumman Corporation (NYSE:NOC), formed in 1939, is considered one of the leaders in global security, selling most of its products to the U.S. Government, especially the Department of Defense. Most of its operating income, $1.22 billion, or 38.4% of the total 2012 operating income, was generated from the Aerospace Systems segment. The Electronic Systems ranked second, with $1.19 billion in operating income while the Technical Services and Information Systems segment contributed $268 million and $761 million, respectively, in 2012 operating income.
Sales to the U.S. Government, $22.7 billion, accounted for 90% of total sales. Interestingly, most of its revenue derived from cost-type contracts and fixed-price contracts. Around 56% of its sales were cost-type contracts, while the remaining 44% were fixed-price contracts.
A cannibal that pays good dividends
As of March 2013, Northrop Grumman Corporation (NYSE:NOC) has around 235 million total outstanding shares. With the announcement of the plan to buy back 25% of the total shares, the company’s board effectively raised the total authorized amount to $5 billion. In the past five years, Northrop has kept buying back its shares on the market, reducing the total shares from 335 million to only 235 million.
The company has not only returned cash to its shareholders via share buybacks, it has also consistently paid increasing dividends for the past ten years. The dividend rose from $0.80 per share in 2003 to $2.15 per share in 2012. The company is trading at $81.50 per share, with a total market cap of nearly $19.2 billion. The market values the company at only 5.6 times EV/EBITDA.
Is Northrop the best buy compared to its peers?
What I like about Northrop Grumman Corporation (NYSE:NOC) is its low valuation compared to its peers, including General Dynamics Corporation (NYSE:GD) and Lockheed Martin Corporation (NYSE:LMT). General Dynamics, at $76.70 per share, is worth around $27 billion on the market. It has a much higher valuation than Northrop at 7.36 times EV/EBITDA. General Dynamics also generated the majority of its revenue from sales to the U.S. Government. In 2012, sales to the U.S. Government were $20.85 billion, or 66% of the total revenue. However, these sales have been decreasing in the past three years, from 72% to only 66%.