Stock Fall an Ominous Sign for Northrop

Northrop common stock, battered by weeks of decline, fell below $1 billion in market value Thursday, a potentially important juncture for the troubled aerospace firm.

“This is a watershed event,” said Paine Webber defense analyst Jack Modzelewski. “The stock is getting down close to the book value. These are the classic signs that disfavor for this stock is quite high.”

The firm’s shares fell 87.5 cents to close at $21.25 each in composite trading Thursday on the New York Stock Exchange, down from a range of about $26 a share during most of the summer. The stock peaked at $56.625 in the third quarter of 1985 and was last below $1 billion in total value in 1981. The firm has 47 million shares outstanding.

Prudential-Bache analyst Paul Nisbet observed: “It is just a beat-up stock, that’s what it boils down to. You can’t even talk to a portfolio manager about it. They don’t want to hear the name.”

Nisbet noted that Cooke & Bieler, a major institutional investor, has been liquidating some of its more than 1 million Northrop shares, selling about a half million shares in the second quarter.

“There have been long-term holders who have been throwing in the towel,” Nisbet said. “I think it is purely market psychology.”

But with Northrop’s annual revenue approaching $6 billion and with its stock worth less than $1 billion, Modzelewski said: “Something is wrong with the picture here. This has real meaning.”

The sharp decline in market value has left Northrop vulnerable to a possible takeover by another aerospace firm, even though insiders control an estimated one-third of the firm’s shares, analysts said.

Dividend Under Pressure

Although the specific reasons for this week’s decline are unclear, the company has been under legal and political attack for nearly three years for its performance on various government contracts. Moreover, it has $1.1 billion in debt and concern has arisen over whether it can manage its delicate cash flow. The company lost $78.1 million in the second quarter.

Solomon Bros. analyst Gary Shapiro was quoted Thursday by a private Wall Street newsletter as saying the company might be forced to cut its 30-cent quarterly dividend.

If Northrop takes just one more writeoff that exceeds $50 million, it could be in violation of terms of its loans, Shapiro said, adding that the company could always renegotiate the terms.

Northrop spokesman Tony Cantafio said that, based on the current outlook, “we see no reason we would not continue to pay a dividend.”

A well-informed source in the banking industry said in a recent interview that Northrop’s lending consortium, lead by Chase Manhattan Bank, fully supports the company. But he added that there is “concern” about the company’s financial position.

“We all feel the company is going to survive,” he said. “Whether it is going to be the same company remains to be seen.”

“Our support is undiminished for the company,” he added. “We are not uncomfortable about their level of debt, but we would like to see it come down faster than it is likely to.”

Analysts noted that the B-2 Stealth bomber, which accounts for half of Northrop’s $5.8 billion in annual revenue, has fared better than expected in congressional budget deliberations this summer. But the debate has also elevated investor perceptions of risk.

“The B-2 is viewed as a negative at this point,” said Nisbet. “It is an uncertainty, and investors don’t like uncertainties.”