Northrop Grumman: 3 reasons to buy

Market weakness and sequester fears are creating a buying opportunity for this defense industry leader.

By TheStockAdvisors Jun 24, 2013 10:48AM

money, plane, airplane, cash, hand, travelBy Mike Cintolo, Cabot Top Ten Trader


After a decade of conflict, the U.S. is cutting back on defense spending and generally pulling back from overseas commitments, with the much-ballyhooed sequester likely to cut orders for big defense companies for years to come.


So why is giant Northrop Grumman (NOC) one of the strongest stocks in the market right now? For three main reasons.


First, the stock is dirt cheap, as investors had priced in their worst fears before the sequester took place. Even today, after a decent upmove, shares trade at just 11 times earnings, and the company pays a dividend of $2.44 annually (2.9% yield).


Second, management has proven deft at boosting profit margins, so earnings are expected to stay north of $7 per share going forward. (Earnings totaled just $3 per share back in 2003.)


Third and most important, management is using its gigantic cash flow to embark on an unbelievable share repurchase plan -- it just added a whopping $4 billion to its share repurchase plan, and the top brass said it's aiming to buy back 25% of the outstanding shares by the end of 2015.


Imagine. That alone will keep earnings per share elevated, and could pave the way toward bigger dividends (less will need to be paid in total with fewer shares outstanding).


Not surprisingly, NOC was a do-nothing stock for months and years, but shares tightened up in March, and broke out powerfully in late April. Then shares got an added kick on May 17, when management announced its aggressive share buyback plan.


Lastly, we like how the stock has etched slightly higher highs and higher lows since mid-May, even as the market has done the opposite. The dip into the low $80s is buyable.


We don't think Northrop is going to double, but we think it has a shot to trend steadily higher in the months ahead.


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