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3 Defense Stocks to Buy, 1 to Sell Before Earnings

Playing the shutdown with defense stocks could score a win for your portfolio

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Buy: Northrop Grumman

northropgrummanThe government shutdown might delay cash changing hands between the Pentagon and its contractors, but booking that backlog is still pretty important. Northrop Grumman (NOC) managed to snag nearly $1.3 billion in defense contracts the Friday before acquisition officers closed the books.

Those deals include nearly $800 million to provide logistics support to Air Mobility Command aircraft at several U.S. air bases through September 2015 and a new $114 million contract to begin initial production of three new Lot 11 Block 20 Global Hawk drones. NOC also landed a new $227 million deal to design, develop and build the U.S. Navy an E-2D Advanced Hawkeye early warning aircraft that can be refueled in flight.

Another bright spot: The Affordable Care Act’s health insurance exchanges opened for business on Oct. 1 despite the government shutdown — amid reports of myriad glitches and constrained server capacity. NOC, which has deep expertise in healthcare IT (and won a contract in July to build and operate a new Web-based enterprise system for Tennessee) seems a great choice to boost its penetration in this sector now.

In the second quarter, Northrop Grumman increased its full-year EPS guidance despite revising revenue slightly downward to $24 billion. Cost-cutting is a huge priority at NOC, and the company has done a great job of raising profitability through layoffs and other measures. Northrop Grumman also has done a solid job of generating cash, most of which has been distributed to shareholders through share repurchases and dividends — its current yield is 2.6%.

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