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Northrop (NOC) Increases Share Buyback Authorization by $3B

Zacks

Northrop Grumman Corp. NOC announced that its board of directors has approved the repurchase of additional shares worth $3 billion as part of a new buyback authorization. This, in turn, has extended the company’s outstanding shares available for repurchase to a value worth $4.1 billion.

Solid Financial Backing Repurchases

Northrop Grumman has been repurchasing shares at a brisk pace and that should give its shareholders every reason to invest in the stock. Notably, the company’s strong balance sheet and steady cash flow position offer substantial financial flexibility and scope for significant share repurchases. Notably, it ended the first nine months of 2018 with free cash flow (FCF) of $664 million, up a solid 86.5% year over year.

Such solid cash generating capabilities must have made Northrop Grumman’s management confident enough to raise its share repurchase authorization amount.

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Has Orbital ATK Boosted NOC’s Financials?

In June 2018, Northrop Grumman completed the acquisition of rocket-maker Orbital ATK for $9.2 billion. The buyout has added Orbital ATK’s rocket motors, missiles and electro-optical countermeasure product lines to Northrop Grumman’s portfolio, thereby offering enhanced means to generate more revenues in coming quarters. In 2018, Northrop Grumman’s management expects the deal to be accretive to the company’s earnings per share and free cash flow, leading to annual cost savings of nearly $150 million by 2020.

We believe such accretions must have led management to raise the company’s 2018 FCF guidance to $2.5-$2.7 billion from $2.4-$2.6 billion, on the third-quarter earnings call. Such increased cash flow outlook would enable the company to reward its shareholders with even more share buybacks. This, in turn, offers tax benefits to its investors.

The raised FCF outlook should encourage shareholders to keep this stock in their portfolio and attract other investors.

Price Performance

Shares of Northrop Grumman have lost about 15.7% in a year against the industry’s 8.5% growth. The underperformance might have been caused by intense competition the company faces in both domestic and international markets.

Zacks Rank & Key Picks

Northrop Grumman currently carries a Zacks Rank #3 (Hold).A few better-ranked companies in the same sector are Aerojet Rocketdyne Holdings AJRD, Raytheon Company RTN and The Boeing Company BA. While Aerojet Rocketdyne sports a Zacks Rank #1 (Strong Buy), Raytheon and Boeing carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet Rocketdyne delivered average positive earnings surprise of 19.27% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has moved north 43.3% to $1.82 over the past 90 days.

Raytheon delivered average positive earnings surprise of 6.71% in the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings has moved up 1.7% to $10.10 cents over the past 90 days.

Boeing delivered average positive earnings surprise of 28.01% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has moved up 3% to $15.05 over the past 90 days.

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