Earnings Analysis: Northrop Grumman Corp. (NYSE:NOC)

Earnings Analysis: Northrop Grumman Corp. (NYSE:NOC)Northrop Grumman Corporation (NYSE:NOC) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Northrop Grumman Corp.’s analysis versus peers uses the following peer-set: The Boeing Company (NYSE:BA), Lockheed Martin Corporation (NYSE:LMT), General Dynamics Corporation (NYSE:GD), Raytheon Company (NYSE:RTN), BAE SYSTEMS PLC ORD (PINK:BAESF), Rockwell Collins, Inc. (NYSE:COL) and L-3 Communications Holdings, Inc. (NYSE:LLL). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

(We also published Earnings Analysis: General Dynamics Corp. (NYSE:GD) and Earnings Analysis: Lockheed Martin Corp. (NYSE:LMT) earlier today.)

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 6,270.0 6,274.0 6,198.0 6,506.0 6,612.0
Revenue Growth % (0.1) 1.2 (4.7) (1.6) 0.8
Net Income 459.0 480.0 506.0 548.0 520.0
Net Income Growth % (4.4) (5.1) (7.7) 5.4 0.0
Net Margin % 7.3 7.7 8.2 8.4 7.9
ROE % (Annualized) 17.0 18.1 19.4 19.7 17.3
ROA % (Annualized) 7.3 7.6 8.0 8.7 8.2

Valuation Drivers

Northrop Grumman Corp. trades at a lower Price/Book multiple (1.6) than its peer median (4.4). The market expects NOC-US to grow earnings about as fast as the median of its chosen peers (PE of 8.8 compared to peer median of 9.7) but not to expect much improvement in its below peer median rates of return (ROE of 17.4% compared to the peer median ROE of 23.8%).

The company’s asset efficiency (asset turns of 1.0x) and net profit margins of 7.9% are both median for its peer group. NOC-US’s net margin is similar to last year’s high of 7.9%, which compares to a low of -3.8% in 2008.

Economic Moat

The company’s top line performance is not as good as its peers (year-on-year change in revenue is -24.0%) but its earnings performance (2.4% change year-on-year) has been similar to the peer median. Unless the company maintains or improves this relative earnings growth, it is in danger of lagging its peers.

NOC-US’s current return on assets is around the same as its peer median (7.9% vs. peer median 7.3%). This recent performance contrasts with its less than peer median return on assets over the past five years (4.1% vs. peer median 6.8%) suggesting that the company’s relative operating performance is improving.

The company’s gross margin of 23.7% is around peer median suggesting that NOC-US’s operations do not benefit from any differentiating pricing advantage. However, NOC-US’s pre-tax margin is more than the peer median (11.7% compared to 9.7%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

While NOC-US’s revenues growth has been below the peer median in the last few years (-8.0% vs. 1.5% respectively for the past three years), the market still gives the stock an about peer median PE ratio of 8.8. The market seems to see the company as a long-term strategic bet.

NOC-US’s annualized rate of change in capital of -3.4% over the past three years is less than its peer median of 3.0%. This below median investment level has also generated a less than peer median return on capital of 11.3% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Earnings Quality

NOC-US’s net income margin for the last twelve months is around the peer median (7.9% vs. peer median of 7.3%). This average margin and relatively conservative accrual policy (3.6% vs. peer median of 2.5%) suggests possible understatement of its reported net income.

NOC-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Graph of Revenues Trend for Northrop Grumman Corp. (NYSE:NOC)
Graph of Revenues Trend for Northrop Grumman Corp. (NYSE:NOC)
Graph of Net Margin Trend for Northrop Grumman Corp. (NYSE:NOC)
Graph of Net Margin Trend for Northrop Grumman Corp. (NYSE:NOC)
Graph of Accruals Trend (% revenues, Quarterly) for Northrop Grumman Corp. (NYSE:NOC)
Graph of Accruals Trend (% revenues, Annual or TTM) for Northrop Grumman Corp. (NYSE:NOC)

Company Profile

Northrop Grumman Corp. is a global security company which provides innovative systems, products and solutions in aerospace, electronics, information systems, and technical services to government and commercial customers worldwide. The company operates through four business segments: Aerospace Systems, Electronic Systems, Information Systems, and Technical Services. The Aerospace Systems segment is a premier developer, integrator, producer and supporter of manned and unmanned aircraft, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems critical to maintaining the nation’s security and leadership in technology. Aerospace Systems’ customers include government agencies and use these systems in many different mission areas, including intelligence, surveillance and reconnaissance; communications; battle management; strike operations; electronic warfare; missile defense; earth observation; space science; and space exploration. The segment consists of four business areas: Strike & Surveillance Systems; Space Systems; Battle Management & Engagement Systems; and Advanced Programs & Technology. The Electronic Systems segment is engaged in the design, development, manufacture, and support of solutions for sensing, understanding, anticipating, and controlling the environment for global military, civil, and commercial customers and their operations. Electronic Systems provides a variety of defense electronics and systems, airborne fire control radars, situational awareness systems, early warning systems, airspace management systems, navigation systems, communications systems, marine systems, space systems, and logistics services. This segment consists of five business areas: Intelligence, Surveillance & Reconnaissance Systems; Land & Self Protection Systems; Naval & Marine Systems; Navigation Systems; and Targeting Systems. The Information Systems segment is a global provider of advanced solutions for the DoD, intelligence, federal civilian, state and local agencies, and international customers. This segment products and services are focused on the fields of command, control, communications, computers and intelligence; air and missile defense; airborne reconnaissance; intelligence processing; decision support systems; cybersecurity; information technology; and systems engineering and systems integration. This segment consists of three business areas: Defense Systems, Intelligence Systems, and Civil Systems. The Technical Services segment is a provider of logistics, infrastructure, and sustainment support, while also providing a wide array of technical services, including training and simulation. This segment consists of three areas of business: Defense and Government Services division; Training Solutions division; and Integrated Logistics and Modernization Division. The company was founded by Jack Northrop founded in 1939 and is headquartered in Falls Church, VA.


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This article was originally written by abha.dawesar, and posted on CapitalCube.