Buckingham: Northrop Grumman Investors Have Excellent Entry Point

Defense contrator Northrop Grumman NOC notched an upgrade from Buckingham Research Group Tuesday in the wake of a July 25 second-quarter earnings beat.

The Analyst

Buckingham's Richard Safran upgraded Northrop Grumman from Neutral to Buy and raised the price target from $246 to $371.

The Thesis

The upgrade is long overdue, Safran said in a Tuesday note. (See the analyst's track record here.) 

After a sell-off in Northrop shares, the analyst said investors have what he considers an excellent entry point in the stock. 

“A core reason for our upgrade is that we think NOC could benefit from continued defense spending increases above expectations,” Safran said. “As investors gain visibility into [fiscal 2020] spending levels (later this year), we think that NOC (and defense in general) multiples expand and the stocks re-rate.”

Timing plays an important factor in the upgrade, as it was largely determined by the stock selling after Q1 and Q2 reports, the analyst said.

Safran named three reasons for Buckingham's upgrade: 

• Q2 execution issues were one-time in nature and not representative of any more risk than is seen in peers. 
• Shares appear to discount 2020 defense spending growth, which Buckingham projects will rise 8 percent year-over-year. 
• Northrop has a 6-percent free cash flow yield, almost in-line with more cyclical industrial stocks, yet the company's cash flow is supported by government spending and has visibility from a "growing backlog." 

Price Action

Northrop Grumman shares were trading up more than 2 percent to $300.85 at the time of publication Tuesday afternoon. 

Related Links: 

All The Major Executive Departures Of 2018 — So Far

Northrop Grumman: Looks Attractive After Earnings Pullback

U.S. Navy photo via Wikimedia.