Northrop’s Shares Take Wing as the Firm Shifts Focus

Though still a mid-tier player in a league of aerospace giants, Northrop Grumman Corp. keeps tweaking its operations in search of faster growth--and Wall Street is finally taking notice.

Long thought an obvious takeover target amid the defense industry’s merger craze of recent years, Northrop Grumman in the meantime is busy making niche acquisitions itself to focus less on aircraft building and more on electronic-warfare gear, information systems, radars and sensors that use cutting-edge technology.

The Century City-based company is confident those areas will stay high on the Pentagon’s priority list, rekindle its own sluggish sales and earnings growth and help it adapt more smoothly to the winding down of its most controversial program, the B-2 stealth bomber, which is built in Palmdale.

And now Northrop Grumman, led by Chief Executive Kent Kresa, is mulling another step in that strategy: shedding its commercial aerostructures business, which makes fuselages for the Boeing 747 jumbo jet and other major parts for airliners and executive jets. One of its big plants is in Hawthorne, which employs about 1,000 people.

Caryle Group, a privately held Washington firm that holds stakes in several aerospace firms, is reportedly one of the suitors for the business, but Northrop Grumman so far has not elaborated beyond its statement Monday that it’s “exploring its strategic alternatives” for the unit.

Kresa declined to comment pending Northrop Grumman’s first-quarter earnings announcement due Monday. But he’s said he looks for “solid growth in both sales and earnings” starting in 2001.

The aerostructure group’s prospective sale again bumped up Northrop Grumman’s stock, and now the shares have surged 49% in just the past five weeks. The stock, which in prior years had badly lagged not only its peer group but also the broader stock market, gained another $1 a share, to $64.81, in New York Stock Exchange composite trading Tuesday.

The nation’s fifth-largest defense contractor, Northrop Grumman previously has conceded that it doesn’t see sizable long-term growth for the commercial aerostructures line, whose problems last year included production snags at Boeing. The division accounted for $1.4 billion of Northrop Grumman’s overall 1999 revenue of $9 billion.

In fact, the company’s annual revenue has been stuck around $9 billion for the past few years, but Wall Street is looking ahead for better earnings gains from Northrop Grumman’s restructurings--and at the potential that Northrop Grumman might get acquired.

Indeed, Northrop Grumman’s order backlog should swell starting in the current quarter, in part because of a recent contract to supply radar and other gear for 80 F-16s being built for the United Arab Emirates, analyst Cai von Rumohr of S.G. Cowen Securities Corp. in Boston said in a recent report.

Northrop Grumman also builds a major portion of the F/A-18 fighter jet in El Segundo, where it has about 2,500 workers. The company employs about 10,000 in California overall.

Lockheed Martin Corp. tried to buy Northrop Grumman in 1998, but the merger was blocked by the Pentagon. Still, speculation remains that Northrop Grumman is ripe to be bought by a foreign aerospace concern. The rumors intensified after two of Europe’s aerospace leaders, DaimlerChrysler Aerospace of Germany and Aerospatiale Matra of France, agreed in October to merge.

Also fueling the speculation was Alcoa Inc.’s recent agreement to buy Cordant Technologies Inc., a maker of rocket engines that was formerly called Thiokol Corp. After that, “quite a few of the aerospace stocks were revisited by investors, but Northrop Grumman in particular,” said Paul Nisbet, president of JSA Research Inc., an aerospace consulting firm in Newport, R.I.

Some analysts also have been lifting their earnings forecasts for Northrop Grumman. Nisbet recently revised his 2000 estimate from $7.30 per diluted share to $7.80, and he sees the company earning $8.60 a share in 2001.

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Northrop Upturn

Prospects for an upturn in Northrop Grumman’s sales and profit have sharply lifted its stock price recently. Weekly closes and latest on the NYSE:

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Tuesday: $64.81, up $1

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Source: Bloomberg News