Northrop gunning for big profits from US defence
Studying the balance sheet numbers for our target company today, the US aerospace and defence giant Northrop Grumman, I began to think of the statesman Georges Clemenceau, who once slyly observed that 'war is too serious a matter to entrust to military men'.
If he was around today, what would the savvy Frenchman have thought about the idea of out-sourcing military business to a listed corporation? That's what seems to be going on at Northrop and its compatriots.
Last year, the group had revenues of $24.5bn (€21.1bn). However, some $21bn of this came from one customer, Uncle Sam.
A few weeks ago, the US Senate passed a defence budget worth an enormous $700bn (€603bn), confirming the view that there is always plenty of money for the defence industry. The industry lobby is one of the most effective in Washington, and has considerable leverage. Every state in the US has operations making fighter jets, aircraft carriers and space products, employing thousands, thus equipping the lobbyists with all the pressure they need to get the politicians' attention.
Northrop Grumman is one of the most effective. It is a leading contractor to the US defence and intelligence services and the fourth-largest global defence contractor. It delivers systems, services and products for undersea, outer space and cyber space. The group has sales of $24.5bn (€21.1bn), boasts a market value of $52bn (€44.8bn) and employs some 67,000 people.
The group was formed as the Northrop Aircraft Corporation, before World War II, by Jack Northrop. In 1994, it acquired the Grumman Corporation, builder of the famous Apollo Lunar Module. Since then the group has been on a determined growth path, mopping up companies like Litton, Westinghouse Electronics, TWR and, last month, Orbital ATK, a rocket and missile producer. The company has been careful to pursue policies that demanded keen political savvy. Nor has it jibbed at the idea of paying large political campaign contributions.
Today, Northrop Grumman has a broad portfolio of capabilities and technologies which, to the normal stock picker, demands an imagination broader than 'Star Wars'. The group has three businesses: aerospace, mission systems and technology services. The aerospace business designs, develops and produces space craft, laser weaponry, stealth bombers, fighter jets, surveillance aircraft and unmanned aircraft for intelligence, surveillance and reconnaissance. Other key programmes include Golden Hawk, a high-altitude system providing imagery of large geographical areas, and Triton systems, providing detailed information over vast ocean and coastal regions. This business had $11bn sales last year, and operating profits of $1.2bn.
Northrop's mission systems business generated revenues similar to aerospace but with higher operating profits at $1.4bn.Its many products and services include jamming devices, air and missile defence, space observation, electronic warfare systems, global battle space systems and cyber management for defence and national security, a critical business today. The group's technology service is its smallest, if you call $4.8bn (€4.1bn) revenues small. The business is involved in the refurbishment and overhaul of products like Minuteman ballistic missiles, aircraft and air sea and ground systems for the US, UK, Nato and Japan.
Northrop Grumman results for the year included higher operating income, earnings per share and cash from operations. Operating income at $3.2bn (€2.7bn) was an increase on the previous year and free cash flow was strong at almost $2bn (€1.7bn).
Northrop knows how to keep shareholders sweet, as dividend payout was increased for the 13th consecutive year. Support for the stock in the past five years has been very strong. The shares have moved from $63 to a recent record high of $307 (€264). Today they trade at just under $300 with a price earnings multiple of around 25. Like most US corporations its dividend yield is meagre, but if one was an 'ethical investor' it is unlikely you'd buy this stock.
Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.