Earlier this week, I opined that far from being good for "absolutely nothin'," war has been very good for profits at America's leading defense contractors. In illustration of which, two members of this exclusive club -- Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) -- upped their 2007 earnings guidance Tuesday.
I've addressed Lockheed's earnings news separately. So in this column, let's focus on Northrop. First, the highlights. In Q2, Northrop:
- Grew its sales 4% to $7.9 billion.
- Expanded its operating margin to 9.4% (which is ahead of the trend).
- Increased profits from continuing operations 4% to $1.31 per share, and its net profits 7%.
- Generated 16% more cash from operations than in last year's Q2. Year to date, cash from operations is more than double what the firm generated in the first half of fiscal 2006.
Based on where it is at the year's halfway marker, Northrop tightened up its guidance for the year, nailing it much closer to the upper reaches of past guidance:
- $31.5 billion in sales.
- Operating margins in the "low 9s."
- $4.90 to $5.05 per share in profits from continuing operations.
- Cash flow from operations approaching $2.8 billion, and free cash flow of close to $2 billion.
Wall Street gets contrary
Sounds pretty good, huh? Well, if you think so, then you probably weren't among the sellers who chipped more than 2% off of Northrop's stock price Tuesday. On Wall Street, good news past frequently gets discounted when combined with anything raising fears of bad news future -- and that, too, was present in the earnings report. Now, I can't say with any certainty what spooked investors Tuesday. Perhaps it was a simple matter of a down day on the markets pulling even good companies underwater. But perhaps not.
The bad news in the report, as I see it, concerned backlog (you can compare Northrop's usual performance on this front with that of rivals Boeing (NYSE:BA), General Dynamics (NYSE:GD), and Raytheon (NYSE:RTN) in "Say What, SAIC?"). Tuesday's news showed considerable weakness in Northrop's contracts going forward, as the firm booked only $6.6 billion in new, funded contracts during the quarter.
You can look at that number either of two ways -- both bad. On the one hand, $6.6 billion may sound like a lot, but it's 19% less than last year's Q2 figure. On the other hand, $6.6 billion -- still a lot -- isn't enough to "top off" the $7.9 billion in revenue recorded during the quarter. This puts at risk the company's ability to maintain sales growth going forward, and to my mind, explains the mini-sell-off.
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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.
