Northrop Empire prepares for big projects in Post-Kresa Era.

NORTHROP Grumman Corp. has the longest-running winning streak among the five biggest U.S. defense contractors.

With third-quarter revenues increasing 11 percent, to $7.41 billion, the Los Angeles-based aerospace company has reported sales growth of 10 percent or more for the 15th straight quarter.

The financial performance reflects two developments: Northrop's acquisition binge under former Chief Executive Kent Kresa and a series of new contracts under Kresa's successor, Ronald Sugar.

"Kent spent 10 years figuring out how we position the company," said Sugar, who took over in April 2003. "My job then is to figure out how we take these magnificent elements of the 20 companies we've acquired, fuse them into one Northrop Grumman and be able to achieve the full potential."

Those companies include Litton Industries Inc., Newport News Shipbuilding Inc. and TRW Inc. "It's very clear that Northrop has succeeded fairly well in these acquisitions," said Marty Pollack, an analyst at NWQ Investment Management Co. in Los Angeles. "They are getting their fair share of contract wins, especially in areas that are important." (NWQ was Northrop's sixth-largest investor with 9.45 million shares at the end of June.)

Just last week, Northrop announced plans to join with Boeing Co. in bidding for the contract to develop NASA's next manned spacecraft, which could carry humans to the moon and Mars.

The contract for the so-called crew exploration vehicle will be the largest awarded by the National Aeronautics and Space Administration in the next five years--worth as much as $5 billion through 2010. Northrop will lead the team's effort to develop the spacecraft and to conduct safety demonstrations in low Earth orbit. If the team wins, Boeing would lead the next phase of preparing the craft for manned moon missions.

"To not be involved in this would be not to play a major role in manned space exploration," said Royce Dalby, an analyst with consulting company DFI International. "It would be an incredible plum for any company to win something like this."

Aside from the NASA effort, Northrop, like other U.S. defense companies, is benefiting from record defense budgets resulting from the conflict in Iraq, and the need for a new generation of ships, fighter jets and communications systems. U.S. defense spending in the year that began Oct. 1 will rise for the seventh straight year, to $416 billion, including $25 billion for Iraq and Afghanistan.

The Company recently reported third-quarter net income of $278 million, compared with $184 million for the like period a year earlier. Northrop shares have risen 12.4 percent this year, well higher than the major market indexes.

Still, the risk Northrop and other defense companies face now is that rising federal deficits may slow future growth in the U.S. defense budget, said Brian James, an analyst at Loomis Sayles in Boston. (Loomis Sayles held 951,000 shares of Northrop as of June.)

"The defense business is going to become increasingly boring as budget growth moderates to mid-single digits," James said. "It's really a story now about execution and generating a lot of cash, hopefully giving shareholders a return."

Northrop's strong position in missile defense, space and surveillance programs such as its Global Hawk unmanned spy plane used in Iraq, is balanced by the risk of cuts to the Navy's shipbuilding budget, Wachovia Securities analyst Robert Spingarn wrote in an Oct. 5 note. Northrop has the most to lose if U.S. shipbuilding is cut to four ships from six as planned in the Navy's 2006 budget. He rates Northrop's shares "Market Perform."

"With several years of defense budget expansion already accounted for, authorization growth may be limited in the near future," he wrote.

But for now Wall Street appears enthused by the company's recent string of news. On Sept. 21, Northrop beat Bethesda, Md.-based Lockheed Martin Corp. for the NASA contract to help design the Jupiter Icy Moons Orbiter. To be launched after 2012, it will be the first NASA mission using nuclear electric propulsion, giving the craft more power for scientific experiments, and greater maneuverability.

The Jupiter orbiter's propulsion system could become a model for spacecraft to carry humans to the moon and Mars, NASA has said. To win, Northrop brought together Newport's expertise in naval nuclear power systems with the almost 50 years of spacecraft design experience inherited with the $12.5 billion purchase of TRW. TRW had built NASA's first spacecraft, the Pioneer 1, in 1958.

"They built an empire," said Jim Zhao, an analyst at Federated Investors Inc. in Pittsburgh, which owned 999,000 shares of Northrop as of June. "Now they are enjoying the growth."

Northrop Grumman Corp.

YEAR (Dec. 31)                 2003    2002

Revenue (billions)            $26.2   $17.2
Total Expenses (billions)      24.7    15.8
Operating Income (billions)    1.54    1.39
Net Income (millions)         854 *   39 *
Earnings Per Share            $2.32   $0.17

* After payment of preferred dividends.

SUMMARY

Business: Defense contractor
Headquarters: Los Angeles
CEO: Ronald D. Sugar
Market Cap: $19.42 billion Dividend Yield: 1.7%
Total Liabilities: $17.12 billion P/E Ratio: 19
Long-Term Debt: 5.12 billion