Northrop Grumman Corporation (NOC), The Boeing Company (BA), Sequestration: Is it a Valid Reason to Short the Aerospace industry?

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After Obama’s signing on defense sequestration and budget cuts, many have formed a bearish point of view on the aerospace and defense stocks. Let’s see if this point of view needs to be rectified to some extent.

Northrop Grumman Corporation (NYSE:NOC)The large-cap defense stock, Northrop Grumman Corporation (NYSE:NOC), reports on April 24. The company is expected to post EPS of $1.74 according to consensus estimates.

The following organic growth rates are expected for each of the company’s segments:

(1) Information Systems down 10%,

(2) Aerospace Systems down 2%,

(3) Electronic Systems down 1%

(4) Technical Services down 9%

The company is expected to burn a free cash flow of $200 billion. This has been the norm in the first quarter of the year, given the seasonality of Northrop Grumman Corporation (NYSE:NOC)’s free cash flow generation.

What causes worries?

The quarterly outlook on the segments looks horrific. Every segment is going to witness a decline in the top-line.

It is interesting to note that Northrop Grumman Corporation (NYSE:NOC)’s guidance for 2013 does not include the impact from sequestration. The company may choose to now include it, which would lower numbers; or it may choose to hold the current assumptions until the timing and size of a sequestration impact is more visible. Goldman thinks the latter is more likely.

Focus items

Analysts will like to know what the company has to say about:



Free cash flow generation

Capital deployment priorities

Well, the next stock under discussion is 787. You have obviously guessed that it’s The Boeing Company (NYSE:BA), and if you haven’t then perhaps this post is not for you since 787 fiasco has been the hottest topic in the aerospace industry. The aerospace giant will report on April 24, and the Street expects the company to report EPS of $1.48, which according to The Boeing Company (NYSE:BA) is GAAP EPS + unallocated pension expense per share.

However, this estimate doesn’t seem to reflect the The Boeing Company (NYSE:BA) Defense segment’s (BDS) revenue, which is expected to be down by 8% for the year. This is another hit to the aerospace company due to defense budget cuts. EPS is expected to be $1.45.

Other important highlights for the quarter are:

1) The Boeing Company (NYSE:BA) reported 137 aircraft deliveries in 1Q13, including one 787 delivery.

2) The Boeing Company (NYSE:BA) booked 209 net new aircraft orders in the quarter, implying a book-to-bill ratio of 1.53 for the commercial aircraft segment.

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