Troy J. Lahr
Northrop Grumman (NOC) reported Q2:2010 EPS of $2.34 compared to our estimate of $2.26 and consensus of $2.19. The stronger results were driven primarily by segment margins of 8.7 percent, which beat our estimate by 50 basis points with stronger performance across all five segments.
Total sales increased 3 percent year-over-year, which was in line with our estimate as stronger growth from Technical Services and Shipbuilding were able to offset softness at Information Systems and Electronic Systems.
We are increasing our 2010 outlook by $0.01 to $6.85.
Joseph B. Nadol III
We believe Northrop (NOC) should deliver in line to above-average growth in the more challenging budget environment we foresee over the next several years.
NOC has the least supplemental exposure of the defense primes, insulating it from the declining Iraq budgets that we expect to be the main driver of lower spending. In addition, Northrop’s spots on manned and unmanned aircraft programs offer exposure to a portion of the budget that should hold up relatively well.
Performance concerns — particularly at the Gulf Coast shipyards — remain an issue; however, we view the company’s strategic realignment in Shipbuilding positively. Given the Shipbuilding industry’s substantial overcapacity, Northrop should be more cost competitive in the future, particularly as the company’s portfolio without the Ships business looks well-aligned with the Department of Defense’s long-term priorities.