3. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 45
Wall Street analysts are bullish on Northrop Grumman Corporation (NYSE:NOC). On August 29, RBC Capital analyst Ken Herbert started coverage of Northrop Grumman Corporation (NYSE:NOC) with a Sector Perform rating and a $550 price target. On August 31, Susquehanna analyst Charles Minervino raised his price target on Northrop Grumman Corporation (NYSE:NOC) to $560 from $530 and maintained a Positive rating on the shares.
On September 22, the U.S. Airforce selected Northrop Grumman Corporation (NYSE:NOC) and Raytheon Technologies Corporation (NYSE:RTX) for the development of Hypersonic Attack Cruise Missiles. Shares of Northrop Grumman Corporation (NYSE:NOC) have surged 25% year to date, as of September 23.
At the end of Q2 2022, Insider Monkey spotted 45 hedge funds long Northrop Grumman Corporation (NYSE:NOC) with stakes worth $992.8 million. This is compared to 39 hedge funds in the preceding quarter with stakes worth $940.3 million. The hedge fund sentiment for the stock is positive.
As of June 30, Yacktman Asset Management is the most prominent investor in Northrop Grumman Corporation (NYSE:NOC) with stakes worth $208 million.
Here is what LRT Capital Management had to say about Northrop Grumman Corporation (NYSE:NOC) in its second-quarter 2022 investor letter:
“Based in Virginia, Northrop Grumman 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.”
