Just a few days ago, Wall Street was certain Northrop Grumman
They were juuuuust slightly off-target.
Not even close
On Thursday, Northrop stunned the investing world by announcing that it will actually report a loss early next month. Northrop intends to take a "$3.0 to $3.4 billion [charge to earnings] for impairment of goodwill" in the fiscal fourth quarter 2008. In so doing, it will write down the value of its shipbuilding and space technology businesses, including Litton Industries and TRW, two firms bought back at the beginning of the decade. The move is intended to bring these divisions' book values into line with their fair values, based on "comparative market multiples."
Danger! Horror! Get out!
Not exactly. Sure, the news sounds bad at first glance, but take a look at Northrop's stock price. Since the news broke, the shares fell Friday, but they're up today. Hardly the reaction you'd expect, following news that an expected half-billion-dollar profit had just been replaced with a $3 billion loss. So here's the good news behind the bad news:
- If not for the charge, Northrop's EPS from continuing operations would have hit "the upper end of prior guidance."
- Even with the charge, Northrop's free cash flow will surpass the upper end of previous guidance.
In short, Northrop currently has a net profit margin worse than almost any of its rivals, including General Dynamics
Charge or no charge, Northrop is now selling for just a skosh more than seven times annual free cash flow. With profits expected to grow at a nearly 13% annual clip over the next five years, I find that an absolutely incredible bargain.