The Zacks Analyst Blog Highlights: Northrop Grumman, Huntington Ingalls Industries, Norfolk Southern, Union Pacific and CSX

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Jul 28, 2011, 09:30 ET

CHICAGO, July 28, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Northrop Grumman Corporation (NYSE: NOC), Huntington Ingalls Industries, Inc. (NYSE: HII), Norfolk Southern Corp. (NYSE: NSC), Union Pacific Corporation (NYSE: UNP) and CSX Corp. (NYSE: CSX).

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Here are highlights from Wednesday's Analyst Blog:

Northrop EPS Beats, Misses Sales

Los Angeles-based leading shipbuilder and defense contractor, Northrop Grumman Corporation (NYSE: NOC) reported second quarter 2011 adjusted earnings of $1.81 per share compared with $1.46 per share in the second quarter 2010.

The results reflect the spin-off of Huntington Ingalls Industries, Inc. (NYSE: HII), the company's former shipbuilding business. Northrop's earnings also exceeded the Zacks Consensus Estimate of $1.67 for the quarter.

Outlook

The company lowered its sales expectation to $27 billion for 2011 from the prior estimate of $27.5 billion. However, it increased its earnings guidance to a range of $6.75 to $6.90 per diluted share from $6.50 to $6.70 per share earlier. The company still expects cash provided by continuing operations before discretionary pension contributions in the range of $2.3–$2.7 billion.

Our Take

Northrop Grumman has a strong presence in Air Force, Space & Cyber Security programs. Its product line is well positioned in high priority categories, such as defense electronics, unmanned aircraft and missile defense. The company anticipates favorable top and bottom lines, from diversified streams, supported by strong growth potential.

However, the positives could be offset by apprehension regarding defense cutbacks on high-cost platform programs, over-exposure to the DoD budget, cost over-runs and inordinate exposure to missile-defense-related programs. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Los Angeles-based Northrop Grumman Corporation is one of the leading defense contractors in the U.S. The company supplies a broad array of products and services to the U.S. DoD, including electronic systems, information technology, aircraft, space technology, and systems integration services.

Norfolk Southern Posts All-Time High Profit

Leading U.S. railroad company Norfolk Southern Corp. (NYSE: NSC) reported its adjusted second quarter earnings of $1.38 per share, beating the Zacks Consensus Estimate by 9 cents.

Adjusted earnings exclude income tax benefits of 18 cents per share. Including the benefit, earnings shot up 50% to a record $1.56 from $1.04 in the year-ago quarter.

The highway-to-railway shift in shipments on the heels of rising fuel prices and tight truck capacity worked in favor of the railroad industry and propelled record second quarter results for Norfolk.

Total revenue climbed 18% year over year to $2.90 billion, surpassing the Zacks Consensus Estimate of $2.75 million, buoyed by higher revenue per unit and double-digit revenue growth across all segments. On a year-over-year basis, Coal, Intermodal and General Merchandise revenues grew 28.3%, 19.7% and 11.7%, respectively.

Operating expenses increased 17.3% year over year driven by higher fuel costs (up 59.7%) as well as increased compensation and benefit expenses (up 10.3%). But operating ratio improved to 69.5% from 69.8% in the year-ago quarter.

Cash Position

Norfolk exited the quarter with cash and cash equivalents of $678 million compared with $827 million at the end of 2010.

Dividend

Norfolk raised its quarterly dividend by 7.5% from 40 cents per share based on record second quarter results. The company will pay an increased quarterly dividend of 43 cents per share on September 10 to shareholders of record as on August 5.

Our Analysis

Norfolk remains well positioned to gain from strong pricing trends, continued volume growth, heavy investments in key projects, increased productivity, new business initiatives and accelerated growth in most of the business segments (especially, Coal and Intermodal). Hence, the company expects strong growth prospects for 2011.

However, several headwinds such as increased headcount, rising locomotive material cost and fuel prices, tightened railroad regulation, market uncertainties and competitive pressure from other leading railroads such as Union Pacific Corporation (NYSE: UNP) and CSX Corp. (NYSE: CSX) will likely limit the upside potential over the near term.

We are currently maintaining our long-term Neutral rating on the stock. For the short term (1–3 months), the stock retains a Zacks # 3 (Hold) rating.

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