Northrop Grumman: Ken Fisher-style buy

by John Reese, editor Validea

One of the country's largest defense contractors, Northrop Grumman (NOC) is involved in aerospace, electronics, and information systems, serving government and commercial customers across the globe.

It has a $16 billion market cap, and gets strong interest from my Peter Lynch-, Joel Greenblatt models. It also gets a 100% rating from my price-to-sale Kenneth Fisher-based model., which is reviewed here.

Northrop's products include unmanned aircraft systems, B-2 stealth bombers, the James Webb space telescope, radar systems, 911 public safety systems, and cybersecurity solutions, to name just a few.

The company conducts most of its business with the United States Government, principally the Department of Defense (DoD) and intelligence community.

It also conducts business with local, state, and foreign Governments and domestic and international commercial customers. Below we review the criteria we assess for our Ken-Fisher model:

PRICE/SALES RATIO: [PASS]

The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. NOC's P/S of 0.62 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.

TOTAL DEBT/EQUITY RATIO: [PASS]

Less debt equals less risk according to this methodology. NOC's Debt/Equity of 37.31% is acceptable, thus passing the test.

PRICE/RESEARCH RATIO: [PASS]

This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. NOC is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.

PRELIMINARY GRADE: Some Interest in NOC At this Point

Is NOC a "Super Stock"? YES

PRICE/SALES RATIO: [PASS]

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.NOC's P/S ratio of 0.62 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.

LONG-TERM EPS GROWTH RATE: [PASS]

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. NOC's inflation adjusted EPS growth rate of 16.28% passes the test.

FREE CASH PER SHARE: [PASS]

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. NOC's free cash per share of 3.85 passes this criterion.

THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS]

This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. NOC, whose three year net profit margin averages 7.14%, passes this evaluation.

Learn more about this financial newsletter at John Reese's Validea.

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