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Northrop Grumman Corporation

Northrop Grumman Corporation

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Northrop Grumman Corporation

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  1. Northrop Grumman Corporation Alex Aponte Section 2 Module 13 – Acct 70311

  2. Brief Overview of Northrop • “Northrop Grumman Corporation is a leading global security company providing innovative systems, products and solutions in a number of key segments.” • Overview video: http://youtu.be/9Y801ye8xcM

  3. Overview of Northrop Grumman • Founded: 1939 under the name “Northrop Aircraft Incorporated” • In 1994, acquired “Grumman Aeronautical to form Northrop Grumman. • Headquarters: Falls Church, VA • Major Customer: U.S. Government (90% of sales)

  4. Four Segments of Northrop • Aerospace Systems – 36.5% of sales – design, development, integration and production of manned aircraft, unmanned systems, spacecraft, etc. • Electronic Systems – 25.5% of sales – designs, develops and manufactures solutions a variety of defense electronics and systems for controlling a military environment.

  5. Segments (continued) 3. Information Systems – 26.9% of sales – focuses on cyber-security; C4ISR; intelligence processing; ad air ad missile defense. 4. Technical Services– 11.1% of sales - provides training solutions, logistics services, and advanced technology in missile defense, nuclear security, and simulations.

  6. Reformulated Balance Sheet – Current Assets

  7. Reformulated Balance Sheet – L-T Assets

  8. Reformulated Balance Sheet – Liabilities & Equity

  9. Reformulated Income Statement

  10. Net Enterprise Assets

  11. Enterprise Profit After Taxes

  12. Sales, EPM, and EATO

  13. Sales Info • Used growth rate of -2.77% from 2014-2015, which reflects current and historic trend of sales growth • Assumed inflation to be around 2%-2.25% • Used 3.0% growth rate from 2016+ based on assumptions in following slides

  14. Sales Growth Can’t Come from U.S. Government

  15. Sales – U.S. Gov’t vs. Other Customers & by Segment

  16. Assumptions for Sales Growth – F-35’s • http://youtu.be/vu5e6pYGKOo • Northrop is a primary contractor on the F-35 project • Average price < $100M • Current Customers: • U.S.: 2,000 F-35’s • Great Britain: 137 F-35’s • South Korea: 60 F-35’s • Potential Revenues of $219.7B to be allocated to major contractors over life of project

  17. Assumptions for Sales Growth - Future Wide-Scale Use of Drones • Facebook has spoken of utilizing drones to bring internet access everywhere in the world • Google has been buying up small robotics companies • Northrop Grumman already specializes in unmanned systems technology, which would include the concept of drones

  18. Cost of Capital (Rent) Info • Beta used was Raw Beta from Bloomberg • Rent of 7.81% vs. Bloomberg’s Rent of 8.9% • Cost of Debt is similar. Bloomberg using lower Market Cap ($24,939) • Went with higher Market Cap after taking into consideration sales assumptions and other cost-cutting factors to be discussed

  19. Discounted Cash Flow Model

  20. Residual Income Model

  21. Abnormal Enterprise Income Growth Model

  22. Value Captured

  23. ValueLine Analyst Report – YE 2013 • “Northrop should be able to improve share earnings through cost management and reduction of overhead” • “Northrop has placed greater importance on commercial operations” (a good thing) • “Aggressive share buyback program is improving share profit” • “Long-term profit-seeking investors should look elsewhere”

  24. Sensitivity Analysis • Market Value = $26,587.91

  25. Buy/Sell/Hold Recommendation • A number of sales opportunities in the coming years (F-35’s, Drones,…) • Seems as though company is in a “mature” growth stage, but the mass-implementation of drones could completely change that • Business is continuing to expand internationally • BUY

  26. Possible Factor for Sales Growth – 2016 Presidential Election • Republican President in 2016 could shake up the budget

  27. Possible Factor for Sales Growth – A Major Terrorist Attack • Another major terrorist attack on U.S. soil, or a significant attack in a major city internationally, could lead to increased defense budgets in the U.S. and worldwide • Sales may grow as a result of defense budget increase • Sales may grow in private sector as citizens seek new ways of self-defense and surveillance

  28. Questions?