Is Northrop Just Putting On A Brave Face?
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Northrop Grumman (NYSE: NOC) raised their profit forecast for 2012. Are they really that confident? The newfound confidence came after a better than expected first quarter. In their defense, their first quarter income did increase by a whopping 2%, mostly aided by sales in Electronics. Net income from continuing operations totaled $506 million, compared with $496 million the year prior. Also, sales declined 8%. Does that truly add up to a case for raising their outlook for the entire year?
After all, 2012 is an election year. Election years historically result in a more volatile and uncertain market, backed by the presently somewhat stagnant economy. Especially when the current President is up for re-election. The US government is NOC's largest client by far. Is it reasonable to expect much defense spending to be happening this year? Candidates looking for a second term tend to steer clear of making large waves in controversial issues. Defense spending has been a big one lately, as we recently learned that the US spends more on defense than all of the other super powers combined. Not that there is really much of a shock in that realization.
Also, the Pentagon's budget for fiscal year 2013 is already looking a little dismal in terms of defense spending. The proposed cuts would affect the company's top selling programs, such as the Global Hawk drone. It would not be wise not to expect much from NOC or its competitors either in 2012 or 2013. Recently, Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), and Raytheon (NYSE: RTN) spent a combined $33.4 million lobbying in Washington in 2011, a 10% increase from 2010. LMT has recently increased its lobbying in Washington, trying to avert the proposed $500 billion budget cuts the Pentagon is facing.
Lockheed Martin has had some mixed news recently. Q1 2012 posted a net income of $668 million with profits up 26%. In addition they announced that CEO Robert Stevens has resigned, but will finish out the year. This is perhaps not the best time to be changing around upper management. Stevens was the lead on the merger that combined two companies to form Lockheed Martin and enforce change. Facing grave Pentagon budget cuts will be left to his successor.
General Dynamics just reported that Q1 2012 revenue decline of 2.8%. And the budget cuts haven't even hit home yet. Right now GD is heavily depending on the U.S. government as a source of revenue. It would be wise to put time and effort into procuring outside clients. Raytheon, however, beat expectations on revenues and earnings per share in Q1 2012. Still, the U.S. government accounts for nearly 80% of Raytheon's sales. The looming budget cuts could be very disruptive for these businesses.
Let's face it, defense contractors are about to come up on some hard times in the next couple of years. Just Monday, Hawker Beechcraft gave layoff notices to 350 employees at its Wichita plant after a reported $633 million loss for 2011. In July, LMT offered a voluntary separation plan to 6,850 salaried employees on its US corporate staff. Hard times indeed. Don't pull out the Kleenex just yet, though. Defense is still a billion dollar industry.
Perhaps NOC is just putting on a brave face for its peers, by raising expectations in the face of looming budget cuts.
Mary Posey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.