NOC – Market expectations are for historically high Uniform ROA, but management has concerns about risk management, new opportunities, and cash generation

• Northrop Grumman Corporation (NOC:USA) currently trades near recent averages relative to UAFRS-based (Uniform) Earnings, with a 19.5x Uniform P/E. At these levels, the market is pricing in bullish expectations for the firm, but management has concerns about their recent lapses in risk management, ability to find new opportunities, and cash generation
• Specifically, management may lack confidence that the Asia-Pacific countries will continue to increase investments in their respective security systems, and may lack confidence in their ability to capture new opportunities going forward. Moreover, they may be concerned about their strategy to transition CEOs, and that the flaws they recently found in their risk management may be endemic. Furthermore, they may lack confidence in the sustainability of improvements in both pension and taxes, and may be exaggerating the extent to which they have evaluated Innovation Systems and operations. They may also lack confidence in their ability to reverse recent declines of income in their Mission Systems segment, and to sustain strong cash generation across their business. In addition, they may be exaggerating the strength of their margins in the Technology Services segment relative to peers, and may lack confidence in their ability to sustain strong working capital performance, particularly in their deliveries. Finally, they may lack confidence in their ability to create value for shareholders, and to focus on performance across the entire company