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