War Footing Seen Adding to Climb in Northrop's Shares.

FOR the past year and a half, Northrop Grumman Corp.'s stock has zigged while the rest of the market has zagged. At no time was this more evident than during the week of the markets' Sept. 17 reopening.

That the Century City-based defense and aerospace contractor opened at $99, $17.06 above its Sept. 10 close, should have come as no surprise. Even as the overall market plunged, investors moved toward defense-related stalwarts like Lockheed Martin Corp., Raytheon Co. and Northrop, whose stocks closed up 15 percent, 27 percent and 16 percent on the day, respectively. Shares received another boost on Sept. 20, with the announcement that Ronald D. Sugar, current president at Northrop's Litton unit and former president of TRW Corp., had been named president and chief operating officer of the parent company. Investors applauded the move, driving the stock up $4.91 on a day the Dow Jones lost 382.92.

Sugar said his ascension is "a culmination of (chief executive) Kent Kresa's repositioning the company from being a company that makes airplanes to providing a full range of technology."

Northrop had been bucking the Dow's downward trend for a full 15 months before the terrorist attack. From March 2, 2000 to Sept. 10, 2001, shares nearly doubled, from $42.32 to $81.94. During the same period, the Dow fell 6 percent.

Unmanned vehicles

Sam Pearlstein, an analyst with First Union Securities in New York, attributes Northrop's gain to a combination of its aggressive growth strategy - highlighted by the $5.2 billion purchase of Litton this spring - and its position in the unmanned aircraft market.

"These sets of technology are exactly what's needed to hunt down terrorists," said Sugar. "The kind of systems we thought would be necessary are exactly the kind (that) should be deployed. The ability to apply smart weapons - electronic warfare to jam and confuse enemy - those are the kind of systems we have."

This is reflected by Northrop's Global Hawk, an unmanned aircraft that has set altitude and endurance records since testing began this spring. Northrop was awarded an $84 million contract last February for the development of the aircraft, 60 of which are expected to be purchased by the Air Force.

The Litton merger, initially met with investor skepticism, also has contributed to the stock climb. Investors expect Northrop to benefit from Litton's expertise in defense electronics and military shipbuilding.

Still, the acquisition had a profound effect on Northrop's balance sheet, pushing long-term debt to $5.3 billion as of June 30, up from $1.6 billion as of Dec. 31, 2000. What's more, increased costs cut operating profit to 7.5 percent of revenues for second quarter ended June 30, down from 17,1 percent in the like period a year ago.

Overall, Northrop Grumman reported net income of $114 million ($1.28 per diluted share) for the quarter, compared with $178 million ($2.55) for the like period a year ago.

Expected revenue climb

Anticipating the hit, Northrop's stock dipped 10.8 percent between the April 2 Litton acquisition and the July 25 announcement of second quarter results. Revenues were $3.7 billion, vs. $1.9 billion a year earlier. That, and the prospect of future growth, helped the stock rebound.

Having posted $7.6 billion in revenues last year. Northrop is expecting a three-year revenue climb, due primarily to the Litton acquisition. Northrop spokesman Frank Moore confirmed the company's forecast of $13.5 billion in revenues for 2001, with estimates of $16 billion and $18 billion for 2002 and 2003, respectively.

Northrop executives declined to comment on either financial figures or potential developments with the Pentagon due to a self-imposed quiet period at the end of the third quarter.

Northrop's fortunes - and those of shareholders - could be further buoyed by decisions due from the Pentagon regarding production of two aircraft: The Joint Strike Fighter and the potential restart of the B-2 Stealth Bomber program.

A decision by the Pentagon between Boeing Co. and Lockheed, of which Northrop would be a secondary contractor, for the Joint Strike Fighter is due by the end of the month. Northrop's Dallas-based Integrated Systems subsidiary would do about 17 percent of the work on the 3,000-aircraft, $200 billion project.

More intriguing is the potential decision on the B-2, 21 of which were produced by Northrop between 1993 and 2000.

[Graph omitted]

YEAR (Dec. 31)                   2000    1999
Revenue (millions)             $7,618  $7,616
Operating Expenses (millions)  $6,520  $6,662
Operating Income (millions)    $1,098    $954
Net Income (millions)            $608    $467
Earnings Per Share              $8.58   $6.69

SUMMARY

Business: Defense-aerospace parts manufacturing

Headquarters: Los Angeles

CEO: Kent Kresa

Market Cap: $8.1 billion

Dividend Yield: 1.69%

Total Liabilities: $12.1 billion

P/E Ratio: 13.9

Long-Term Debt: $5.4 billion