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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Northrop Grumman

July 16th 2010 Northrop Grumman
NYSE Symbol: NOC
Industry: Defense
Price as of 7/16: $54.74

Earnings season has begun and the news is better than expected. Alcoa and CSX started the week with better than expected earnings and good guidance. Intel followed, easily beating estimates, raising profit margins, and said all the right things, yet the stock only rallied a percent. JP Morgan actually sold off following spectacular earnings on Thursday with reduced loan loss reserves. You start to wonder what the companies need to say or do to get their stock to rally. It's understandable the markets would have a tough time rallying this week following an 8% rally last week, but you'd like to see some improvement. Unfortunately the economic data is overshadowing the good earnings. Case in points, Thursday morning a much weaker than expected Philly Fed Manufacturing number sent the Dow down over 100 points in a matter of minutes. On Friday, a weak consumer sentiment number sent the averages down over 150 points.
This week we'll shy away from the growth stocks and literally select a defense stock. The featured stock of the week is Northrop Grumman. Northrop's business remains steady thanks to government spending. The cash flow remains constant as well as the dividend yeild which is now at 3.4% and yet the stock only trades for 8 times next years earnings. This week Citigroup upgraded the stock with a $69 price target. That translates into a 26% return from these levels, not including the dividend. A pretty nice return in a market that does not know which way to go.
Back at the end of April, Northrop Grumman generated net income of $469 million easily beat estimtes by 19 cents led by strong growth in shipbuilding. Business improved for nearly every sector in which the company operates with a 10% jump in the aerospace division and a 26% jump in the smaller shipbuilding segment. Revenue increased 9% to $8.61 billion beating estimates as well. The aerospace and electronics manufacturer, which bought 8.3 million of its own shares during quarter, also increased its 2010 earnings forecast by a nickel, saying it expects to earn between $5.75 and $6 a share from continuing operations this year. In the conference call the company focused on where they can create value, going after margin expansion. The company is also looking for opportunities to create top line growth.
Northrop Grumman's stock remains cheap trading for 9 times this years earnings and 8 times next years earnings. The stock also trades for 0.5 times sales and 1.35 times book value of $42 a share. As mentioned the stock also sports a 3.4% dividend yeild and will go ex-dividend once again next month. As mentioned, Citigroup upgraded the stock this week with a $69 price target. Deutsche Bank has a $73 price target. But not every analyst likes the stock. Goldman Sachs downgraded the stock this week. But in a volatile and uncertain market, Northrop looks like a nice way to play the market.