General Dynamics (GD) vs. Northrop Grumman (NOC) Ahead of Earnings

General Dynamics (GD), and Northrop Grumman (NOC) are set to report earnings this week. Aerospace & Defense companies have been doing relatively well in receiving contracts to design, engineer, and assemble military related products, and the growing fears and worries in regions abroad such as in Ukraine, and more importantly the oil-rich Middle East have caused these aerospace/defense goliaths to dream positively and look forward to delivering quality products in arms sales.

We will look at how these companies differ from each other, and which one may be the best in terms of surprising EPS estimates for the third fiscal quarter.

GD & Financials

GD is currently a Zacks Rank #2 (Buy), and it carries a good chance of a positive surprise in its cards. Thanks to wars in the Middle East and tensions in Eastern Europe, GD may very well be capitalizing on those conflicts, especially the ongoing fight with ISIS, as military aircraft are going to be used extensively in the fight against the terrorist group, and therefore, the need for aviation upgrades and weapons systems could soar. GD looks solid and it has only sought to establish itself as a world leader in providing arms and military equipment to the US army, as well as other armies and governments around the world.

It has made recent acquisitions in the past few years which should only further boost its footing in the aerospace defense industry. In December 2011, GD acquired Force Protection Inc., In February 2012; it also acquired the Enterprise Jet center FBO at Hobby Airport in Houston, Texas. On June 8, 2012, the company also acquired IPW Holdings Inc.

In August 2012, GD added Ship Repair and Coatings Division of Earl Industries to its broad and diverse portfolio of acquisitions. In the same month, it also acquired the defense operations of Gayston Corporation, as well as Fidelis Security Systems Inc. The following month it acquired Open Kernel Labs, Inc., and in December 2012, GD added Applied Physical Sciences Corporation.

GD also looks pretty good on its financials, and the following chart shows a comparison between fiscal quarters Q1 and Q2 for the current fiscal year, 2014:

We can see that GD has performed better at the beginning of the year, rather than in the 2^nd quarter, however, GD has recently been awarded lots of contracts, including $311 million for nuclear submarine support work from the U.S Navy on September 26^th, 2014. But that is not the only award as of late, as GD has also been awarded a $128.5 million contract modification from The Department of Defense to convert the U.S Navy’s planned Mobile Landing Platform USNS Lewis B. Puller into an Afloat Forward Staging Base.

GD has also been given $50 million (two contract modifications) from the Pentagon to continue on submarine support and modernization program for the U.S and Australian navies. Nonetheless, here are also some of GD’s important figures. Bear in mind that the enterprise value figure is taken from Yahoo! Finance.

NOC & Financials

NOC, on the other hand, is also reporting its financial results before the market opening bell, however it is currently a Zacks Rank #3 (Hold), and the company conducts most of its businesses with the US government and Department of Defense (DoD), and the intelligence community. It provides products, services, and integrated solutions in aerospace, electronics, information, and services to its global customers.

Similar to GD, NOC has also made some recent acquisitions including the acquisition of M5 Network Security Ltd in September 2012. In February 2014, it most recently completed the acquisition of Qantas Defence Services Ltd.

Recently it has also been awarded contracts, albeit not as much as GD. Most recently, it has been contracted to supply new altitude and heading reference systems for Airbus helicopters. NOC also has a strong presence in space and cyber security programs, and its product line is more than adequate to produce good revenues.

NOC has had a strong first half 2014 performance, and EPS estimates for 2014, have been raised overall, thanks to unmanned aerial vehicle testing, and products as well as cyber and space security programs.

Also similar to GD, the recent conflicts in the Middle East and Eastern Europe gave rise to strategic acquisitions that will only improve NOC’s footing in the industry, and NOC could cash in on many contracts, as well as military sales. Most recently, NOC has been awarded a whopping $354 million contract in September 2014 from the U.S Air Force to augment its RQ-4 Global Hawk unmanned aircraft system fleet by three aircraft and bring in additional multi-intelligence capabilities.

On the financial side of things, as we can see from the table comparison below for the past two quarters, Q1 and Q2, NOC has been making progress, but it has faltered in the Q2 of 2014, which is also perhaps similar to GD’s performance for the first half of this year. Nonetheless, NOC will definitely be a stock to keep eyes on during earnings before market opens tomorrow, and it could always surprise positively despite maintaining a negative Earnings ESP -0.93%, and a -7.27% EPS Surprise last quarter, ended on (6/30/2014).

It is also important that we look at some of the most important figures for the company’s overall image, in the table below. Bear in mind that the enterprise value figure is taken directly from Yahoo! Finance.

Round Up

It seems that GD is likely a good investment for the long-term, as well as ahead of tomorrow’s earnings. GD ranked higher than NOC according to the Zacks Rank, however it does maintain a higher PEG ratio than the industry’s average, as well as NOC’s PEG ratio, which is far better than GD’s. This means that NOC has a better outlook in the long run, however GD might be better ahead of earnings tomorrow, but it may not be the better stock for long-term growth.

It is clear that NOC also maintains a much lower forward P/E ratio than both, GD’s, and the industry’s average, something definitely worth noting, which determines that it is not overvalued as much as GD is. On the contrary, NOC is actually great as a value stock, since it retains an enterprise value significantly higher than its total market capitalization, and while GD also manages to do the same, it does so, on a far smaller scale.

It will always be up to the investor; however GD sports an average surprise of 5.46%, and a positive Earnings ESP of 0.52%, as well as positive EPS Surprise last quarter of 6.82%. NOC maintains an average surprise of 3.03%. Lastly, GD pays a dividend of $0.62/share, while NOC pays a dividend of $0.70/share. The following is a comparison between both stocks and the S&P 500’s average performance for one year, which demonstrates GD’s superior performance as of late.



Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

*The author has a position in GD at time of writing

Read the analyst report on GD

Read the analyst report on NOC


Zacks Investment Research