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2 Low PE Stocks You Will Love: Discover Financial Services (DFS) and Northrop Grumman Corporation (NOC)

Along with that, recently Discover entered into a financial plan for the Comprehensive Capital Analysis and Review (CCAR) and it will be more aggressive in returning capital to shareholders in 2013. Regulators have set an upper limit of the total return of capital at 100% of net income and only 30% of which can be dividends. I anticipate Discover’s dividend payout ratio to be ~14% in 2013.

Northrop Grumman Corporation

With the $487 billion cut already made in the defense budget over the next decade, the Department of Defense has proposed another ~$500 billion budget cut. This definitely raises some issues for the defense contractors but I don’t think these budget cuts will affect defense giants like Northrop Grumman, Raytheon etc., in the short run. The reason for this is that their existing Defense contracts have long gestation periods and the realization of funds will also take time. If the budget cuts do pound they will hit the company in either 2014 or 2015. In addition, Northrop has been awarded with a contract worth ~$95 million to upgrade Navy’s NGC2P data link processor and is a final contender to develop the next-generation radar system for Navy surface ships which could easily be a ~$16 billion program.

Northrop’s cash reserve is vast enough to sustain the company from such tough times in the short run. Its earnings are more than 5 times its debt and it maintains a forward P/E of 9x. Even if in 2013 profits fall by ~40%, at its current price the company shall be trading at a P/E of about 15x, which still will be less than the industry average of 16x.

What’s in it for investors?

Magna’s strong North American region, increasing focus on emerging economies and restructuring program will help the stock to grow in the future. Discover’s future endeavors and payout plan will fortify the stock. Hence, both of them seem to be a Buy. Finally, because of the cloudy defense budget cuts I will suggest not to make any new positions on Northrop for now

The article 2 Low PE Stocks You Will Love originally appeared on Fool.com and is written by Madhu Dube.

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