5 Most Undervalued Defense Stocks To Buy According To Hedge Funds

3. Northrop Grumman Corporation (NYSE:NOC)

Number of Hedge Fund Holders: 49

Northrop Grumman Corporation (NYSE:NOC) ranks 3rd in our list of the most undervalued defense stocks to buy according to hedge funds. In February, Northrop Grumman Corporation (NYSE:NOC) said it entered into an accelerated share repurchase agreement with Bank of America to buy back $500 million of its common stock.

Northrop Grumman Corporation (NYSE:NOC) recently declared a quarterly dividend of $1.73 per share. The dividend was payable on March 15.

At the end of the fourth quarter of 2022, 49 hedge funds tracked by Insider Monkey reported owning shares of Northrop Grumman Corporation (NYSE:NOC). The total worth of these stakes was $1.5 billion. The biggest stakeholder of Northrop Grumman Corporation (NYSE:NOC) among these hedge funds was Rajiv Jain’s GQG Partners which had a $438 million stake in the company.

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)