Northrop Grumman Corporation Quarterly Valuation – July 2014 $NOC

northrop_grumman_logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor with High Dividend Yields.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Northrop Grumman (NOC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. As of December 31, 2011, the Company operated in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. The Company conducts most of its business with the United States Government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign Governments and domestic and international commercial customers. Effective as of March 31, 2011, the company completed the spin-off of Huntington Ingalls Industries, Inc. (HII). HII operates the Company’s former shipbuilding business. In September 2012, it acquired M5 Network Security Pty Ltd. In February 2014, Northrop Grumman Corp completed the acquisition of Qantas Defence Services Pty Limited.
NOC Chart

NOC data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $123.56
MG Value $311.26
MG Opinion Undervalued
Value Based on 3% Growth $117.23
Value Based on 0% Growth $68.72
Market Implied Growth Rate 3.39%
Net Current Asset Value (NCAV) -$32.00
PEmg 15.28
Current Ratio 1.55
PB Ratio 2.52

Balance Sheet – 6/30/2014

Current Assets $8,390,000,000
Current Liabilities $5,414,000,000
Total Debt $5,927,000,000
Total Assets $25,351,000,000
Intangible Assets $12,468,000,000
Total Liabilities $15,083,000,000
Outstanding Shares 209,130,000

Earnings Per Share

2014 (estimate) $8.57
2013 $8.35
2012 $7.81
2011 $7.41
2010 $6.77
2009 $4.87
2008 -$3.83
2007 $5.16
2006 $4.44
2005 $3.81
2004 $2.99

Earnings Per Share – ModernGraham

2014 (estimate) $8.08
2013 $7.58
2012 $6.33
2011 $5.08
2010 $3.77
2009 $2.48

Dividend History

NOC Dividend Chart

NOC Dividend data by YCharts


Northrop Grumman qualifies for Enterprising Investors but not for Defensive Investors.  The Defensive Investor has concerns regarding the low current ratio and the lack of earnings stability over the last ten years, but the Enterprising Investor’s only concern is the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of Lockheed Martin (LMT) and ModernGraham’s valuation of Raytheon Corp (RTN).  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.77 in 2010 to an estimated $8.08 for 2014.  This low level of demonstrated growth outpaces the market’s implied estimate of 3.39% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Northrop Grumman (NOC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Northrop Grumman (NOC) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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