Northrop Grumman for a Defense

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Northrop Grumman (NYSE: NOC) reported earnings for the second quarter this morning, and, to no real surprise, it beat the estimates of $0.75 by reporting $0.81 a share. This is a 48% increase over the same quarter last year. Revenues were $7.37 billion compared with the estimate of $7.17 billion. The company also slightly raised its guidance for the rest of 2004 to $29 billion in revenue and earnings from $2.90 to $3 per share.

If you are not familiar with the company, Northrop makes technology solutions for just about every complex system in the military. Its products are the brains in things such as precision weapons, surveillance, and satellites. The Newport News division is the U.S.'s only builder of nuclear-powered aircraft and one of two companies building nuclear-powered submarines. The company also makes the B2 stealth bomber.

Northrop is a mature company, and you can see that in the numbers. Margins are thin but compare well with the other large-cap defense stocks at 14% for gross margin and 6% for operating margin over the last 12 months. The price-to-sales ratio is 0.70 and price to book is 1.2. While both seem cheap, it makes sense that this type of industrial company is not priced for some type of future perfection.

There are reasons beyond the solid earnings reports and good fundamentals to consider owning this stock. It's a fact that in the months following the Sept. 11 attacks, Northrop was up 27% while the Standard & Poor's 500 was flat. With ongoing uncertainty over future terrorist attacks, and warnings from government officials about that possibility through our election season, it's something to think about. It may seem coarse to note, but it's reasonable to expect certain sectors, such as defense, to do well again should something happen, as the market perceives increased spending on defense.

I have written before about the importance of owning stocks that zig when the market zags. Defense stocks like Northrop have a track record of doing this. While that certainly does not guarantee the stock will go up if we are attacked again, based on market history, odds are that is what will happen. If the environment for stocks stays as it has been for the last six months, I want to put the odds in my favor any time I can.

Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time his clients owned Northrop Grumman, but he owned none of the stocks mentioned.