5 Most Undervalued Industrial Stocks To Buy According To Hedge Funds

4. Northrop Grumman Corporation (NYSE:NOC)

Number of Hedge Fund Holders: 49

Northrop Grumman Corporation (NYSE:NOC) has been in the spotlight as geopolitical tensions heat up around Russia-Ukraine war amid the United States’ pledge to continue supporting Ukraine no matter the costs. Recently, Credit Suisse analysts lowered their estimates for Northrop Grumman Corporation (NYSE:NOC)’s earnings before interest and taxes from 2023 to 2025. The investment firm’s analysts also decreased their price target for the stock to $490 from $500.

At the end of 2022, 49 hedge funds tracked by Insider Monkey reported owning stakes in Northrop Grumman Corporation (NYSE:NOC). The total value of these stakes was over $1.5 billion. The biggest stakeholder of Northrop Grumman Corporation (NYSE:NOC) during this period was Rajiv Jain’s GQG Partners which owns a $428 million stake in the firm.

LRT Capital made the following comment about Northrop Grumman Corporation (NYSE:NOC) in its October investor letter:

“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue 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 (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).

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 approximate 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…” (Click here to read the full text)