Zacks_Analysts' Blog : Northrop Gears Up For F-35 Fighter - Analyst Blog

Los Angeles-based leading shipbuilder and defense contractor Northrop Grumman Corporation (NOC) signed a long-term F-35 Joint Strike Fighter (JSF) program parts agreement with an Australian advanced materials company Quickstep Technologies. Per the agreement, Quickstep Technologies will supply components for the JSF program that includes F-35 lower side skins, maintenance access panels and fuel tank covers. Northrop expects first delivery of production parts in May 2012.

The F-35 is a supersonic, multi-role, stealth fighter developed and funded by a consortium of nine countries, including Canada. It is designed to excel in both air-to-air and air-to-ground operations and features the most comprehensive and powerful avionics that any fighter has ever produced. Northrop Grumman is developing the F-35 together with its principal industrial partners, Lockheed Martin Corporation (LMT) and BAE Systems Plc. (BAESY).

Northrop Grumman is slated to release its fiscal 2010 numbers on February 9, 2011. The Zacks Consensus Estimate for the fourth quarter is $1.01, representing a year-over-year decrease of 19.8%. The Zacks Consensus Estimate for 2010 is $5.98, up 17.5%. Northrop Grumman has had a mixed track record with regard to earnings estimates in the last four quarters with a trailing four-quarter average of 1.01%.

We believe that Northrop Grumman is fundamentally a sound company and has a strong market position, but we are cautious about near-term bumps. The company currently is trading at a discount to both the peer group and the S&P 500, based on forward earnings estimates.

Northrop’s product line is well positioned in high priority categories, such as defense electronics, next-generation ships, unmanned aircraft and missile defense. Revenue and earnings growth continues to be driven by its strong presence in the cyber security, intelligence, surveillance and reconnaissance market.

However, we believe all the above positives have already been taken into account. Currently the stock is moving laterally due to the absence of any positive cues. We believe the trend would continue in the near term and thus retain a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) on the stock. We are also maintaining our long-term Neutral recommendation on the stock.