That, I fear, is very hard to say. On the one hand, Northrop Grumman Corporation (NYSE:NOC) boasts the lower valuation just mentioned. On the other, it pays a higher dividend than does General D. On the third (?!) hand, however, if General Dynamics has been pegged on Wall Street for an anemic 6% growth rate, analysts think Northrop is in considerably direr straits — and that its earnings will actually shrink over the next five years, falling at an annualized rate of 1.4%.
Given that, as investors, we prefer to invest in growing businesses rather than shrinkers, I therefore cannot endorse RBC’s recommendation of Northrop, either. Much as I’d love to go “contrarian” and recommend a defense play today, the numbers just don’t justify it.
And speaking of numbers…
A better idea than buying these companies may be selling them, selectively. Take Standpoint Research’s recommendation to take profits on Spirit AeroSystems Holdings, Inc. (NYSE:SPR) today, for example.
According to Standpoint, this stock is up 55% since the analyst last recommended it. Spirit AeroSystems Holdings, Inc. (NYSE:SPR)’s enjoying a particularly sharp spike this morning, on rumors that British engineering firm GKN is contemplating a buyout offer for Spirit AeroSystems Holdings, Inc. (NYSE:SPR) at $35 a share. (The shares currently cost a bit less than $26).
Standpoint says that it tends to discount takeover rumors, and warns that if no buyout materializes, and Spirit AeroSystems Holdings, Inc. (NYSE:SPR) perhaps reports poor earnings news “as it did in Q42012 and the stock collapses”, well, that’s a future shareholders would not particularly enjoy sticking around to see. Then again, if you “play it safe” and sell the shares today, you’re locking in a clean 7% profit, minimum, if you bought the shares yesterday, and a 55% profit if you bought back when Standpoint told you to.
Result: A $26 bird in the hand being worth a $35 turkey in the bush, Standpoint is pointing investors toward the easy money today, and I agree with that advice.
Spirit AeroSystems Holdings, Inc. (NYSE:SPR)’s not a horrible business; in fact, analysts see the company growing earnings at 13% over the next five years, which is faster than either of the defense stock plays discussed up above. That being said, Spirit’s 87-times-earnings valuation is still more than a little rich for such growth prospects, and with no dividend checks in the offing, there’s really very little reason to stick around.
Personally, I’d take the money and run, and let someone else worry about whether the buyout rumors are right or not.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Spirit AeroSystems Holdings (NYSE:SPR). The Motley Fool owns shares of General Dynamics and Northrop Grumman.
The article Thursday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.
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