If you were holding stock in Northrop Grumman Corporation (NYSE:NOC) when Trump was inaugurated, you’re a big winner. NOC stock is up 51%, doubling the gain in the Dow Jones Industrial Average between then and Feb. 14.
You have also gotten a $1-per-share quarterly dividend, which has since risen to $1.10-per-share.
The good news won’t stop. The European Commission approved its acquisition of Orbital ATK Inc (NYSE:OA) on Feb. 12. The FTC is still reviewing the deal, but approval is expected. Orbital will become part of a new Northrop Grumman Innovation Systems unit.
Orbital makes NOC a player in rockets and will bring Northrop’s quarterly revenues to nearly $8 billion. The company adds $7.8 billion in debt to the balance sheet, but analysts are raising price targets and ratings on NOC stock after the acquisition.
There is little question that Northrop Grumman stock is great again.
NOC Stock: Defense Rises Benefit
Both the U.S. and the European Union are increasing their defense budgets, and by 2024, most European countries will be spending 2% of their GDP on defense. The U.S. is expected to spend $686 billion on defense in the next fiscal year and much of that is expected to go into the kind of advanced hardware NOC specializes in.
As a result, analysts are smiling on NOC stock. Half of them now have it on their buy lists and the ratings have been strengthening for months. Analysts now expect Northrop to earn $15.47-per-share for the current fiscal year, and $17.93-per-share next year.
Small wonder that Northrop Grumman stock rose after earnings in late January, even though those took a 66% hit, accounting for the Trump tax cut. What the IRS took away in the 2017 numbers will come back, with interest, in 2018, with profits and cash flow expected to surge by 33%, and those profits to be taxed at a lower, 19.5% rate.
Slow and Steady
Despite the run-up in the stock price, NOC stock is a slow growth company. Its 2017 revenues of $25.8 billion was up just 5% over the previous year’s $24.5 billion, and its profit margins are declining slowly.
This makes the Orbital acquisition crucial from a growth standpoint, and it comes at an opportune time. The debt-to-assets ratio of over 40%, achieved because Northrop decided to buy Orbital for cash, should quickly come down once Orbital’s assets get onto the NOC balance sheet.
Orbital also gives Northrop Grumman stock a much bigger play in space, and it has hopes of greater penetration in the booming Asian market.
Bottom Line Northrop Grumman Stock
So long as the military build-up lasts, NOC stock is going to be a great place to be.
But investors should understand that defense spending has a boom/bust cycle. Generals never get every new toy they want, and changes in global politics are always possible that will scale those dreams back even further.
Northrop Grumman stock’s gains will likely be in-line with its sector, not out of line.
The NOC stock chart pattern during the last year has been almost identical to that of Raytheon Company (NYSE:RTN), which mainly operates in different areas of the budget, with sensors, missiles and cybersecurity. It also bears a striking resemblance to that of Lockheed Martin Corporation (NYSE:LMT), which is considerably larger and, thus, more diversified.
This makes the group easy for an investor to follow. Just look at the headlines. When you see a threat of war, you’re in the money. When someone cries peace, you sell.
It’s a pretty cynical way to make money but it seems to work.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.