LRT Capital Management, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be downloaded here. A return of -7.37% was recorded by the LRT Economic Moat strategy for the first quarter of 2022, resulting in a 12-month return of +16.72%. In the LRT Economic Moat strategy, as of April 1st, 2022, the fund’s net exposure was approximately 99% and its estimated net beta-adjusted exposure was 62.2%. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, LRT Capital Management mentioned Northrop Grumman Corporation (NYSE:NOC) and explained its insights for the company. Founded in 1994, Northrop Grumman Corporation (NYSE:NOC) is a Falls Church, Virginia-based multinational aerospace and defense technology company with a $68.4 billion market capitalization. Northrop Grumman Corporation (NYSE:NOC) delivered a 13.52% return since the beginning of the year, while its 12-month returns are up by 21.72%. The stock closed at $439.40 per share on April 29, 2022.
Here is what LRT Capital Management has to say about Northrop Grumman Corporation (NYSE:NOC) in its Q1 2022 investor letter:
“Based in Virginia, Northrop Grumman is one of the world’s largest defense contractors with annual revenue of more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation has resulted in the US defense market being controlled by five large companies: The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).
Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This has allowed Northrop Grumman to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximate 15x next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-18, the F-35 and the F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; Raytheon dominates missile systems; and so on.
Northrop’s revenue growth over the past decade has been mediocre but even that has led to impressive shareholder returns that have far outpaced the S&P500. What’s more, we believe that revenue growth may accelerate in the next few years. A lot of ink is spilled every year about the “massive” U.S. defense budget that critics claim is “out of control”. Given this, you might be surprised to hear that U.S. defense spending as a share of GDP is at the lowest level in recorded history, at a mere 3.8%. In other words, U.S. military spending could double and not be out of line with historical norms. While we are not calling for a new Cold War, given the global instability we are witnessing, it is not unreasonable to expect U.S. defense spending to grow faster than GDP over the next decade.”
Our calculations show that Northrop Grumman Corporation (NYSE:NOC) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Northrop Grumman Corporation (NYSE:NOC) was in 33 hedge fund portfolios at the end of the fourth quarter of 2021, compared to 29 funds in the previous quarter. Northrop Grumman Corporation (NYSE:NOC) delivered a 18.79% return in the past 3 months.
In April 2022, we also shared another hedge fund’s views on Northrop Grumman Corporation (NYSE:NOC) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.