Corporate Welfare of the Worst Kind

Is $500 million for Northrop Grumman necessary to save this defense contractor?

Go to www.stockcharts.com and look up the stock (ticker symbol is NOC). You’ll see that at the time of Hurricane Katrina, Northrop’s stock was trading at about $54/share; after Katrina, it bottomed out at $52.17 (October 11, 2005). In recent days it has traded as high as $71.37/share (April 24, 2006).

Northrop closed today at $67.24, up $0.34 on the day. Its capitalization is $23.84 billion. By contrast, at the time of Katrina, Northrop’s market capitalization was about $19.15 billion. Thus, since Katrina, Northrop’s market cap has exploded by $4.69 billion, or a whopping 24.5% in just seven months.

And this company needs a $500 million bailout? Its ship building division, to which the money is earmarked, reported 1Q06 sales of about $1.1 billion and a profit margin of 6%. That is down only slightly from the 7.1% margin the division posted in 1Q05.

The prudent investor, recognizing the strength of this great American company, would have been wise to invest in Northrop imediately after Katrina artificially caused its stock price to slide slightly. That investor would have realized a gain of about 25% in seven months—an annualized return of about 43%!

Good luck to Senator Coburn in his efforts tomorrow to remove the earmark for Northrop from the supplemental.

—Bill Lauderback.