Competition
As a manufacturer of defense electronics, information systems and aerospace equipment for private businesses and national military groups alike, Northrop Grumman competes with some of the most recognizable industrial concerns on the planet. Chicago-based The Boeing Company (NYSE:BA) and cross-town rival General Dynamics Corporation (NYSE:GD) are two of its closest competitors.
Of these three companies, Northrop Grumman Corporation (NYSE:NOC) has the smallest valuation by a decent margin. Its $20 billion market capitalization is about four times smaller than that of The Boeing Company (NYSE:BA) and about 50% smaller than that of General Dynamics Corporation (NYSE:GD). However, it is the most profitable of the three firms: Its final profit margin of nearly 8% beats out Boeing’s 5% figure and General Dynamics’s minus 1% miss.
It achieved this result on the strength of $2 billion in 2012 profit and $25 billion in gross revenues. By comparison, The Boeing Company (NYSE:BA) earned $4 billion on revenues of about $81 billion. General Dynamics Corporation (NYSE:GD) lost $325 million on just over $31 billion in revenues. Northrop Grumman Corporation (NYSE:NOC) also has a juicy levered free cash flow figure of nearly $2.2 billion. This compares to $1.2 billion for Boeing and $3.2 billion for General Dynamics.
Adding It Up: Value Play or Value Trap?
The idea that Northrop Grumman Corporation (NYSE:NOC) could eventually become a takeover target for a larger competitor like General Dynamics Corporation (NYSE:GD) or Raytheon Company (NYSE:RTN) is intriguing. Regardless of whether the company represents a compelling value at its current levels, its status as a possible acquisition play might make it more attractive than it otherwise would be. By attracting interest from more aggressive investors and traders, this status is also liable to lend additional support to Northrop’s stock price.
Even if a buyout does not come to pass, it is important to put Northrop Grumman Corporation (NYSE:NOC)’s capital-return blitz into perspective. As bloggers and market-watchers have astutely noted, the company’s moves will effectively return capital to shareholders at a 12% annual rate. This rate of return comes without many of the risks that usually attend pure dividend yields of 12%.
In sum, Northrop Grumman Corporation (NYSE:NOC)’s capital-return measures make it a nearly irresistible value play for investors with any affinity for the potentially volatile defense space. The possibility that the company may eventually be tapped as a takeover target could provide additional support for its stock price. Going forward, value investors and arbitrage-seekers alike would do well to keep Northrop Grumman on their watch lists.
The article This Company Looks to Return Capital to Shareholders in a Big Way originally appeared on Fool.com.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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