Northrop

Grumman Corp. (NYSE: NOC)

Last Price: $85.53 VIEW: HOLD

7/10/2013

Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. As of December 31, 2011, the Company operated in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. 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. Effective as of March 31, 2011, the company completed the spin-off of Huntington Ingalls Industries, Inc. (HII). HII operates the Company's former shipbuilding business. In September 2012, it acquired M5 Network Security Pty Ltd.

Sector: Industrial Goods Highlights: Northrop Grumman provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. The stock closed yesterdays trading session at $85.53. In the past year, the stock has hit a 52-week low of $61.86 and 52-week high of $86.00. Technical indicators for the stock are positive. NOC has a market cap of $20.1 billion and is part of the Industrial Goods sector Industry: Aerospace/Defense Major Diversified

GROWTH AND BALANCE SHEET The company reported that it earned $489 million, or $2.07 basic earnings per share ($2.03 diluted earnings per share), for the quarter that ended March 31. That's down from $506 million, however earnings per share were better for the current year first quarter in comparison to the same quarter last year of $2.00 basic earnings per share ($1.96 diluted earnings per share. Revenue fell 1.5 percent, to $6,104 million from $6,198 million, with sales dropping in the Information Systems and Technical Services business segments. NOCs consensus earnings forecast for the quarter ending June 2013 is of $1.59 to $1.82 per share. GAAP operating margin was 12.4 percent, compared to 12.8 percent in the first quarter of fiscal 2012. Cash flow from operating activities was 1 million, compared to $-135 million in the first quarter of fiscal 2012. VALUATION NOC PE stands at 10.86 below the industry average of 18.62 and below the S&P 500 average of 18.41. The company is currently trading below the preferable P/E ratio of 15x and over the last five years, the companys shares have traded in the range of 8.1x to 11.01x trailing 12-month earnings. NOC's current Price/Sales of 0.80 is below the average of its industry, of 1.83. NOCs head to head comparison to its main competitors shows that the company has better gross margin and operating margin, and it is trading at lower P/E and P/S multiples than the main competitors. However Northrop is smaller than all of the companies in the peer group. The stock is currently trading 19% above its intrinsic value of $71.65 this suggests that the stock is overvalued at these levels. The beta of 0.97 implies leveled to slightly lower volatility of the stock with respect to the S&P 500. Northrop Grumman has shown very satisfying earnings consistency over the last five, However, NOCs earnings per share over the last five years have grown only by 9.27% and the current quarter earnings in comparison to the same quarter last year have grown only by 3.5% which is well below the required level of 15%. NOCs current price levels are nearly close to the all-time high of 86, and the technical indicators are positive. The majority of the analyst ratings are hold. NOCs Total Debt/Equity is 41.63% and is not acceptable for our model. NOC has a dividend payout ratio of 28%. RECOMMENDATION for next 6 months: We initiate our coverage with HOLD. The company has demonstrated positive technical signs but the valuation is very expensive at current price level. NOC is up 28.60% year-to-date. Our overall score for NOC is 6.36. For options trading we suggest: Buy the August 2013 call with a strike of 85.00 priced at $2.75 per contract Net credit to start: $2.75

 Northrop Grumman Corporation NOC 20.11B Beta 20.50B 1 Month Stock Returns 10.86 Year to Date Stock Returns -4.43 1 Year Stock Returns 0.8 3 Year Stock Returns 2.12 52-Week Change 0.82 S&P500 52-Week Change 5.71 52-Week High 2.60% 52-Week Low 50-Day Moving Average 0.43% 200-Day Moving Average

VALUATION Market Cap: Enterprise Value P/E PEG Ratio Price/Sales Price/Book Enterprise Value/Revenue Enterprise Value/EBITDA Dividend Yield Held by insiders NEWS and CALENDAR

0.97 1.97% 28.60% 38.90% 88.36% 36.15% 23.17% 86.00 61.86 82.62 72.83

Tue, Jul 9, 2013 Northrop Grumman Selected to Set Up, Sustain Tennessee's Medicaid and Children's Health Insurance Eligibility System Tue, Jul 9, 2013 Fixed-Price Deals May Not Control Costs, Pentagon Says Mon, Jul 8, 2013 Northrop Grumman Moves New B-2 Satellite Communications Concept to the High Ground Wed, Jul 3, 2013 Northrop Grumman Selects Amy F. Hopkins, Thomas E. Laux to Lead Elements of New Business and Advanced Systems Development Organization NOC Strengths Diversified business portfolio Strong market position High barriers of entry

NOC Weakness Low concentration of buyers Government contracts volatility Government policy and budget cuts

 Competitor Comparison NOC Market Cap: 20.11B Employees: 68,100 Qtrly Rev Growth -0.02 Revenue 25.12B Gross Margin 0.22 EBITDA 3.59B Operating Margin 0.12 Net Income 1.96B EPS 7.88 P/E 10.86 PEG -4.43 P/S 0.8

BA 79.42B 174,400 -0.03 81.21B 0.16 7.80B 0.07 4.08B 5.33 19.65 1.16 0.98

GD 28.10B 92,200 -0.02 31.34B 0.17 3.71B 0.10 -325.00M -0.92 N/A 1.98 0.9

LMT 34.84B 120,000 -0.02 46.96B 0.09 5.28B 0.09 2.84B 8.66 12.65 1.64 0.74

Industry N/A N/A 0.13 N/A 0.17 N/A 0.12 N/A N/A 18.62 N/A 1.83

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock's expected risk and return. I am using different fundamental and technical factors in order to rank a stock. Intrinsic value of the stock Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized. NOC Intrinsic Value EPS ttm EPS Growth (Assumption) PE DIVIDEND PAYOUT EXPECTED STOCK RETURN in 2022 Forecasted Stock Price Earnings Per Share after the 10th year TOTAL DIVIDENDS Forecasted Stock Price in 2022+DIVIDENDS 26.73 146.98

7.88 1.03 10.86 28% 1.07

120.25 11.07

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 TOTAL EPS

EPS 8.15 8.43 8.73 9.03 9.34 9.66 10.00 10.34 10.70 11.07 95.47

Net Present Value

71.65

NOCs intrinsic value is $71.65 the current price is $85.53, the stock trades 19% above its fair value. Financials The financial health of the company the higher the better, we evaluate all the financial ratios of the company. Sentiment Investors sentiment for the stock Analyst ratings The model assigns a value according to analysts recommendation for the stock. Analyst rating on Reuters.com is 2 Buy, 2 Outperform, 14 Hold, 1 Underperform, and 1 Sell. Earnings Consistency We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. NOCs annual EPS for the last 5 years were 3.04, 4.49, 6.41, 7.54, and 7.96 this type of earnings action is very favorable. Total Debt/Equity The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry NOCs Total Debt/Equity of 41.63 is not acceptable. EPS This Quarter VS Same Quarter Last Year The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. NOCs EPS growth for this quarter relative to the same quarter a year earlier is 3.50% below our target. Annual Earnings Growth This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. NOCs annual earnings growth rate over the past five years is 9.27%, below our target growth rate.

 Current Price Level Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. NOC's 52 week high is $86.00 current price is $85.53, is 0.50% below the 52 week high. P/E Ratio The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 11.71 the average industry P/E ratio is 18.62 and is below the S&P 500 P/E ratio of 18.41. Insider Ownership When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.43% of NOC stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model. Technical Analysis The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value. NOC is trading in the range of $80.64 - $86.00 in the past 30 days. The stock has been showing support around $81.50 and resistance in the $84.30 range. The stock is trading above the 50-Day Moving Average and 200-Day Moving Average. RSI(14): 65.75. From the graph on page 1 it can be seen that the stock has broken out of a flat trading channel in the middle of April and since then has been on the run and it is currently trading at all-time highest level. Our indicators give a positive view on NOC.

 NOC Scorecard COMPANY:

NOC
5 5 5 5 10 3 4 6 9 8 3 7 70 6.36

f the stock Intrinsic value o

Financials Sentiment Analyst ratings Earnings Consistency Total Debt/Equity Quarterly EPS change Annual Earnings Growth Current Price Level P/E Ratio Insider Ownership Technical Analysis

SCORE RECOMMENDATION:

HOLD