Morningstar | NOC Updated Star Rating from 25 Oct 2018
Wide-moat Northrop Grumman reported third-quarter results that beat consensus earnings estimates thanks to lower-than-expected taxes and solid operating margin performance across its businesses. Management again increased its full-year 2018 earnings per share guidance this quarter to $18.75-$19 from $16.60-$16.85. We're maintaining our $320 fair value estimate. The stock currently looks a bit undervalued at a price/fair value of around 0.90.Revenues increased 23% thanks to the first full quarter consolidating the Orbital-ATK acquisition. Excluding Orbital-ATK (now called Innovation Systems), revenue grew only 1.5%. The new Innovation Systems business came charging out of the gate, registering 16% year-over-year growth. We think it's too early for this to be an indication of robust revenue synergies. Rather, it's just strong end-market demand, in our view. Technology Services dragged down results and continues to face headwinds, with revenues shrinking 12% year over year this quarter due to the completion of several programs such as JRDC, VITA, and KC-10 tanker logistics support. Aerospace Systems and Mission Systems increased revenue 5% and 3%, respectively. Compared with similar businesses in other defense companies, we're a bit disappointed with the Mission Systems growth.
For the first time this year, segment operating margins expanded year over year to 12.1% in the quarter compared with 11.5% during the same period last year. Aerospace Systems and Mission Systems achieved margin expansion, whereas Technology Services saw margins compress slightly. Management moved up segment operating margin guidance by about 50 basis points to the mid-11% range. Free cash flow (operating cash flow less capital expenditures) fell $28 million to $693 million due to pension contributions and higher capital spending.
Despite the poor top-line performance, Technology Services' margins only dropped 20 basis points to 10.5%. We'd previously flagged the possibility of CEO-elect Kathy Warden, who has a background in government services work, restructuring Technology Services, and on Oct. 24 Northrop announced that it is consolidating two separate business areas in the segment. We think this makes sense. We're looking for growth to return to Technology Services in 2019 on the back of this streamlined structure and higher U.S. defense outlays.
Northrop Grumman is a security company. The company's segments include: Aerospace Systems, which is engaged in the design, development, integration and production of manned aircraft, autonomous systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems; Innovation Systems, which is engaged in the design, development, integration and production of flight, armament and space systems; Mission Systems, which is engaged in end-to-end mission solutions and multifunction systems; and Technology Services, which is engaged in delivering solutions and services in support of mission-critical networks and systems.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.