One-Hour Analysis of Northrup Grumman

From Value Line

  • Stock has consistently underperformed since 2002, stock has been flat for over 10 years
  • Stock is cheap in term of cash flow, not that cheap in terms of book value
  • Took a big charge in 2008, a pretty good size negative
  • Made several large and probably bad acquisitions in 2001-2
  • Have done a spectacular job of deleveraging ever since
  • Balance sheet is almost “too good”, they could certainly afford acquisitions, over $3 billion in cash
  • Margins are at all time highs, this is more a negative than a positive
  • Impressive size of stock buyback, these guys have really “got religion” in terms of really working for shareholder
  • VL shows small pension liability, this needs further investigation
  • Lots of mixed signals here, not quite as clean as LLL

From Footnotes

  • Helped by shipbuilding spinoff in 2011
  • R&D spending down over 10% in last 3 years, a potential negative
  • Complex pension accounting issues
  • IRS tax review underway
  • Added unused credit lines of $2 billion, again raising fear of acquisitions

From Google Finance

  • Fairly young CEO with a financial background
  • Hated by Wall Street, even 5 outright sell recommendations
  • First Eagle and Harris are holders, a minor positive
  • Greenblat, Pzena, Grantham, and Dreman were recent sellers

From Seeking Alpha

  • No significant reports over the last few years

Conclusion

Since the fear of potential acquisitions is such a major issue we took the time to listen to recent analyst presentation at the Cowen Aerospace conference. In answer to a question about their “portfolio”, the CFO gave a very carefully worded answer that amounted to “we are always looking”.  This company has done many things right, but might be ready to do something wrong.  Pass for now.

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About Gregg Jahnke