War Machines: Who Wins Fight Between Northrop and Lockheed?

When it comes to stock prices, a company’s sector is important. So much so, Cramer has said 50% of what investors pay is based on the type of business in question. But that still leaves another 50%, which largely depends on the performance of the company itself. That certainly explains the difference last week between Lockheed Martin and Northrop Grumman’s earnings reports.

“The world of defense spending has changed,” Cramer said. “That’s what these two quarters tell us.”


Lockheed Martin may have beaten the Street’s profits estimates by 22 cents a share, but revenues missed by 3%. Also, the company’s funded backlog dropped 3.5% from the previous quarter, and the 2010 outlook was well below analysts’ expectation. There was a $1 billion discretionary contribution to Lockheed’s pension plan, which hit the full-year cash from operations total, Cramer said, and the “pension problem seems to be getting worse, not better.”

Worse for Lockheed, though, is the Defense Department’s shift in priorities. The government just doesn’t want the company’s products: no more F-22 Raptor fighter planes, no more VH-17 Presidential helicopters, nor any combat search-and-rescue helicopters or multiple-kill vehicle systems. And that’s not even taking into account the program cuts that will hurt the space division’s 2010 revenues and keep flat Lockheed’s electronics sales.

Lockheed is hoping for earnings growth in the mid single digits on hopes that its F-35 Joint Strike Fighter will start to ramp again, but that’s not enough to make LMT a buy. The best thing about the stock is its cheap price-to-earnings multiple of nine times 2011 earnings. But that depends on whether or not you believe the company’s earnings estimates, Cramer said, and the forecast didn’t reflect “a high level of confidence in its future prospects.”

Northrop Grumman , however, looks to be the polar opposite. This firm won $10 billion worth of contracts in the third quarter, its backlog increased to $71.5 billion, and the orders are coming in faster than NOC can fill them. Also during the quarter, the aerospace systems division climbed 5%, electronic systems 2%, technical services 4% and shipbuilding jumped 14%. And these numbers don’t include Northrop's new $3.8 billion KC-10 air-to-air tanker maintenance contract, which was signed just after the earnings report.

Northrop Grumman has what the Pentagon wants – electronics, information and intelligence, now that President Obama occupies the White House – while Lockheed Martin, with its high-tech weapon systems, does not. Even better, Northrop has a faster growth rate of 12% in 2011 (versus Lockheed’s 7%), it’s cheaper at eight times earnings, and it has a similar 3.5% dividend yield. That’s why Cramer told viewers to buy the NOC and sell LMT.

“Northrop Grumman is the better stock and the better company,” Cramer said, “hands down.”

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