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Stifel analyst Joseph DeNardi upgraded
to Buy from Hold in a call, made for three reasons, that has the stock on the move.
He lifted his target for the share price to $475 from $350, while the stock (ticker: NOC) was up 3.1% in midday trading at $378.01. The
and
for comparison, were up about 0.7% and 0.2%, respectively.
DeNardi likes Northrop because, he says, its valuation is compelling, its business franchises are of high quality, and because the world is still a dangerous place. He cited “a still-elevated global threat environment” in a report discussing the rating change.
Northrop is trading for about 14 times estimated 2021 earnings. That is a small premium to its P/E ratio of prior years, but it is a big discount to the figure for the overall market, at about 21 times. Valuations have gone up broadly, but for the most part, defense stocks have been left out. At current levels, DeNardi says “downside risk is very limited.”
What’s more, he sees potential for higher P/E multiples down the road because of the company’s position on key government programs. Northrop is building the next-generation stealth bomber and helping to replace the U.S. nuclear-missile arsenal.
Skeptics about defense stocks point out that government deficits could lead to spending cuts that might hurt Northrop’s sales. But DeNardi thinks people are underestimating the need to spend to counter rising threats from across the globe, though his report didn’t list them.
Northrop stock is up 24% year to date, beating comparable gains of the market, but it has only risen about 12% over the past 12 months. The S&P 500 is up about 34% over that span.
(LMT) shares, for comparison, are down 2% over the past 12 months.
The weak relative performance is despite both companies meeting analyst estimates and raising financial guidance in recent quarters. Investors appear to prefer other sectors as the economy starts to grow again.
That preference may underpin the opportunity DeNardi sees. With the upgrade, more than 70% of analysts covering Northrop stock rate shares at Buy. The average Buy-rating ratio for stocks in the S&P is about 55%.
Write to Al Root at allen.root@dowjones.com
