4. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 45
Northrop Grumman Corporation (NYSE:NOC) operates as an aerospace and defense company worldwide. It is one of the top drone stocks to invest in. On October 4, the US Army awarded a $69.82 million modification contract to the firm to provide mission support for the planning, coordination, and execution of exercises conducted by US Army’s Mission Command Training Program. The work will be completed by October 2023.
On October 11, Credit Suisse analyst Scott Deuschle initiated coverage of Northrop Grumman Corporation (NYSE:NOC) stock with an Outperform rating and a $560 price target, noting that the company has the strongest strategic positioning within the industry and offers the best multi-year sales growth in defense.
At the end of the second quarter of 2022, 45 hedge funds in the database of Insider Monkey held stakes worth $992.9 million in Northrop Grumman Corporation (NYSE:NOC), compared to 39 in the previous quarter worth $940 million.
In its Q2 2022 investor letter, LRT Capital Management, an asset management firm, highlighted a few stocks and Northrop Grumman Corporation (NYSE:NOC) was one of them. Here is what the fund said:
“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue of more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation the US defense market is now controlled by five large companies: The Boeing Company, General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation, and Raytheon Technologies Corporation.
Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This industry structure has allowed Northrop to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximately 15x, next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ division submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-35 and F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; and so on.
The company’s revenue growth over the past decade has been mediocre but even that has led to impressive shareholder returns that have far outpaced the S&P500. What’s more, we believe that revenue growth may accelerate in the next few years. A lot of ink spilled every year about the “massive” U.S. defense budget7 that critics claim is “out of control”8. Given this, you might be surprised to hear that U.S. defense spending as a share of GDP is at the lowest level in recorded history,9 at a mere 3.8%. In other words, U.S. military spending could double and not be out of line with historical norms. While we are not calling for a new Cold War, given the global instability we are witnessing, it is not unreasonable to expect defense spending to grow faster than GDP over the next decade.”
