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Northrop Grumman (NOC) Up 4.9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Northrop Grumman (NOC). Shares have added about 4.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Northrop Grumman due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Northrop Grumman Beats on Q2 Earnings, Ups '19 EPS View

Northrop Grumman reported second-quarter 2019 earnings of $5.06 per share, which surpassed the Zacks Consensus Estimate of $4.64 by 9%. The bottom line also increased 12% from $4.50 reported in the year-ago quarter.

Total Sales

In second-quarter 2019, Northrop Grumman reported total sales of $8,456 million, which surpassed the Zacks Consensus Estimate of $8,401 million by 0.7%. Sales also increased 19% from the year-ago quarter’s $7,119 million. The upside was primarily driven by solid single-digit increase in the Mission Systems’ sales.

Segmental Details

Aerospace Systems: Sales at this segment totaled $3,390 million, up 2% year over year. This improvement was backed by increased sales due to higher volumes of Manned Aircraft and Space programs.

Operating income rose 1% to $361 million, whereas operating margin contracted 10 basis points (bps) to 10.6%.

Mission Systems: Segment sales increased 9% to $3,128 million on higher sales in Cyber and ISR, Advanced Capabilities, and Sensors and Processing business areas.

Operating income rose 15.9% to $408 million while operating margin expanded 80 bps to 13%.

Technology Services: Sales at this segment dipped 0.4% to $1,044 million, owing to lower Global Services sales.

Operating income increased 19% to $113 million, with operating margin expansion of 170 bps to 10.8%.

Innovation Systems: Second-quarter 2019 sales in this segment increased 8% to $1,498 million compared with proforma sales of $1,400 million in the second quarter of 2018. The increase was principally due to higher sales at Flight Systems and Defense Systems.

Meanwhile, the segment’s operating income totaled $169 million and operating margin expanded 150 bps to 11.3%.

Operational Update

Total operating costs and expenses at the end of the quarter were $7,510 million, up 19.2% from the year-ago quarter’s $6,302 million.

Operating income during the quarter increased 15.8% to $946 million.

Financial Condition

Northrop Grumman’s cash and cash equivalents as of Jun 30, 2019, were $1,088 million, down from $1,579 million as of Dec 31, 2018.

Long-term debt (net of current portion) as of Jun 30, 2019, was $13,838 million, down from $13,883 million as of Dec 31, 2018.

Net cash inflow from operating activities as of Jun 30, 2019, was $694 million compared with $638 million as of Jun 30, 2018.

2019 Guidance

Northrop Grumman expects to generate revenues of $34 billion during 2019. The Zacks Consensus Estimate for the company’s full-year sales, pegged at $33.91 billion, lies below its projected view.

It continues to project free cash flow of $2.6-$3 billion for 2019.

However, Northrop Grumman raised its full-year earnings expectations from $18.90-$19.30 to $19.30-$19.55 per share. The Zacks Consensus Estimate for the company’s 2019 earnings, pegged at $19.41, lies slightly below the mid-point of the company’s guidance.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Northrop Grumman has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Northrop Grumman has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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