Value of a Publicly Traded Corporation's Common Stock Research Paper

Pages: 14 (4030 words)  ·  Bibliography Sources: 6  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business

Northrop Grumman

Corporate History & Situation

Northrop Grumman is the #3 defense contractor in the United States. U.S. government and DOD contracts are worth an estimated $16.1 billion (Rohrlich, 2010), or 47% of the company's revenues. A substantial portion of the remaining revenues comes from other governments and militaries, as well as some civilian commercial work.

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Northrop Grumman was formed in 1994 by the merger of Northrop Aircraft and Grumman Aerospace. Northrop traces its history to 1939 and Grumman to 1930. The company builds military aircraft and aircraft systems, missile systems and aerospace technology. There were significant synergies between the Northrop and Grumman businesses at the time of the merger. Also under the same ownership is Westinghouse, manufacturer of defense systems (radar, for example) and civil aviation systems. It was acquired by Northrop Grumman in 1996. Logicon Corporation provides information systems to both military and commercial customers and was acquired in 1997. Teledyne Ryan is a maker of unmanned aircraft and was acquired in 1999. Litton Industries specializes in naval vessels and technologies and was acquired in 2001. Newport News Shipbuilding produces nuclear submarines and aircraft carriers and was acquired in 2001. TRW makes space systems and satellite payloads and was acquired in 2002. While the company has slowed the pace of major acquisitions in recent years, it has continued with a general strategy of expansion by acquisition that began with the Northrop-Grumman merger (Northrop, 2010).

Financial Performance

Research Paper on Value of a Publicly Traded Corporation's Common Stock Assignment

Northrop Grumman's revenues and profits have been steady over the past five years. The company has seen steady top line growth with revenues increasing from $29.978 billion in 2005 to $33.755 billion in 2009. This represents growth of 12.5% over that five-year time period. Net income over the same period has grown 20.4%, from $1.4 billion to $1.686 billion. There was one year, 2008, that saw a substantial change in net income -- a loss of $1.262 billion -- but that was attributable to a $3.06 billion charge on goodwill that year. Net income ex-of that goodwill charge was $1.798 billion, the highest of the past five years (MSN Moneycentral, 2010).

With slow, steady growth, Northrop Grumman has been able to keep its expenses at a reasonable level over this period. The firm's gross margin in 2005 was 16.9%, and in 2009 it was 16.6%, demonstrating substantial pricing control. Selling, general and administrative expenses were 9.6% of sales in 2005 and 9.3% of sales in 2009, illustrating that the company has significant control over its expenses as well (MSN Moneycentral, 2010). Combined, the cost control and pricing control that Northrop Grumman has demonstrated is indicative of a company that has strong financial controls and is able to operate with a significant level of stability. More remarkable is that the company has also been able to do this through a regime change in the federal government and a major economic downturn.

The company's liquidity ratios have improved in recent years. The current ratio is currently 1.23, up from 1.05 in 2007 and 0.94 in 2005. The cash ratio has also improved over the past five years. It is currently 0.46, compared to 0.149 in 2007 and 0.2 in 2005. Despite an improved liquidity situation, the company has seen its debt increase of late. The debt-to-equity ratio is currently 1.38, compared to 0.88 in 2007 and 1.03 in 2005. The company's levels of long-term debt and total liabilities have not changed significantly over the past five years, but the value of the firm's assets has, resulting in the decline in book value of the firm's equity. The book value of Northrop Grumman's equity has decreased 24.6% over the past five years, while the book value of the firm's assets has decreased 11.5% in the same span of time (MSN Moneycentral, 2010).

The company's managerial efficiency compares well with its industry. The receivables turnover is 7.9 times, compared with an industry average of 7.4 times. Inventory turnover is 22.9 times, compared with an industry average of 12.0 times. Asset turnover is 1.1 times, equal to the industry average. Despite this, Northrop Grumman is not especially profitable compared to its peers. The company's return on equity is 13.3%, compared with an industry average of 30.7%. Northrop's return on assets is 5.5%, compared with an industry average of 7.1% and its return on capital is 7.3%, compared with an industry average of 10.2%. These figures combine to indicate that while Northrop Grumman is relatively successful in terms of managerial efficiency and financial effectiveness, it lags its peers in many categories. The company may not be operating in the industry's most profitable sectors, or perhaps its cost controls and pricing power -- while strong -- are not as strong as those of its peers.

The cash flow statements reveal a couple of interesting things about the financial condition of Northrop Grumman. The company's cash flow from operating activities slumped in 2009. The goodwill writedown in 2008 masked an otherwise successful year for the company, making 2009 appear to be a return to form. Yet the operating cash flows were down from $3.211 billion to $2.133 billion. The other interesting note is that the company is actively engaged in a stock buyback plan. In four of the past five years, Northrop Grumman has bought back at least $900 million worth of shares. This has brought the number of shares outstanding from 356.5 million to 319.2 million. These buybacks have helped to prop up the firm's share value in the face of a steady erosion of the book value of the firm's equity.

In recent years, the company has also worked to manage its resources better. For example, receivables as a percentage of sales is currently 10%, down from 11.8% in 2005. Inventory as a percentage of sales is currently 3.46%, down from 3.88% in 2005. The company's return on equity at 13.3% is much improved over its five-year average of 6.4%. Likewise, return on assets (5.5% versus 3.1%) and return on capital (7.3% versus 3.9%) are also up over their five-year averages. While the company's gross margin was down last year vs. The five-year average (16.9% versus 18.0%), its pre-tax and profit margins were both above the five-year average (MSN Moneycentral, 2010). Overall, Northrop Grumman's performance in recent years has been mixed. While performance in some areas has been strong, the company overall has failed to gain significant momentum.

Even more curious is the way that the company's asset base has fallen in recent years, despite the firm continuing with its expansion strategy. For the past sixteen years, Northrop Grumman has pursued a strategy of growth by expansion, yet the firm is smaller today than it was five years ago. Certainly, the goodwill write-off indicates that some of the previous mergers and acquisitions failed to add the expected value to the firm, but it is also reasonable to conclude that synergies facilitating growth have failed to emerge. This may be why the company has curtailed its M&a strategy in recent years.

Brief Analysis of Future Plans/Corporate Goals

It appears as though Northrop Grumman's emphasis on expansion through acquisition has slowed in recent years. The acquisitions that the company has undertaken in recent years have been much smaller than in the 1990s and early 2000s. These acquisitions have also become more tactical in nature, with the last five all being firms acquired to bolster the company's information systems expertise to capitalize on the growing need for IS integration in weapons, aerospace and naval hardware.

The general trend in the industry has also been to maintain the status quo. The acquisition growth was the result of industry conditions in the early 1990s, but those conditions have changed. The industry is in a state of maturation, but remains profitable due to ongoing investment by the U.S. government and persistent military action in various locations around the world. The political climate is such that the federal government is unwilling to cut programs, as those cuts may result in job loss during a time of high unemployment. Firms in the industry are currently either milking cash cow projects or they are scaling back their operations somewhat in response to slow growth and limited M&a potential.

Northrop Grumman has used this period to focus on internal process improvements. This internal focus is the result not only of the stability of the external environment but of the fact that the company now has a new CEO, Wes Bush, after Ronald Sugar retired following 29 years of service. With the change of leadership the company is in a holding pattern, seeking direction. One recent strategy has been to divest the firm of underperforming assets, with the TASC group being of the largest on the table (Ratnam, 2009).

In the past three months, there have been some changes in the company's focus. One is that the firm has moved its corporate office from Los Angeles to the Washington, DC area in order to be near its biggest customer. The move highlights the importance of the U.S. federal… [END OF PREVIEW] . . . READ MORE

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