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CORPORATE FOCUS–Northrop Is Flying High on Strength of Changing Focus

Even before Northrop Grumman Corp.’s announcements last week of stellar first-quarter results and a new alliance with DaimlerChrysler Aerospace AG, the Century City-based maker of the B-2 bomber had seen its share price skyrocket.

It vaulted about 60 percent from a 52-week low of $42.63 in March to $68 on April 21, and then continued that ascent last week, closing at $69.81 April 26.

Besides the jump in earnings and a general uptick in aerospace industry stocks, investor interest in Northrop has been fueled by a couple of news reports signaling that change is afoot at the nation’s fifth-largest defense contractor, which is focusing on expanding its defense-electronics and information-services businesses.

Northrop Grumman and DaimlerChrysler agreed last week to explore some kind of alliance in sophisticated technology areas including surveillance and reconnaissance systems. Officials say a decision on the nature of the ventures will be reached by June.

“Because this company doesn’t believe transatlantic mergers will happen anytime soon, the thing we need to do is build bridges through these types of alliances where we can share R & D; dollars,” said Northrop spokesman Jim Taft.

According to news reports, the company is also in talks with Carlyle Group of Washington, D.C., to sell its commercial jet-parts unit. Generating about $1.4 billion in annual sales, the division makes fuselages for the 400-seat Boeing 747 jumbo jet and other major parts for airliners. One of the plants, which employs about 1,000 people, is in Hawthorne. Though Northrop is Boeing’s largest subcontractor, sales have waned for the 747 due to soft demand from Asia.

Though Taft wouldn’t comment on the Carlyle reports, he said selling the unit is only one of many options and Northrop “hasn’t ruled out anything.”

The stock has had a tough run in past years because of a confluence of factors, say analysts. At an all-time high of $138 in early 1998, the stock price dropped after the company’s proposed merger with Lockheed Martin Corp. was disallowed.

Yet as Internet companies look increasingly risky, investors are returning to previously undervalued aerospace stocks.

“There’s been a flight from dot-coms and high-techs to the safe haven of defense stocks,” said Paul Nisbet, aerospace analyst at JSA Research Inc. in Newport, R.I. “Investors see a dose of reliability in them.

General Dynamics, the No. 4 U.S. defense contractor, saw its shares rise about 20 percent to $59.31 in the past six weeks. Precision Castparts Corp. has rocketed from $23.69 to $41.81 in the past eight weeks.

Meanwhile, Northrop Grumman is posting the kind of earnings growth investors like to see, easily beating analysts’ estimates during the most recent quarter.

For the first quarter ended March 31, net income was $173 million ($2.47 per diluted share), up from $104 million ($1.50 per share) before the cumulative effect of an accounting charge in the year-ago period. Revenue for the quarter dipped slightly to $2.08 million, from $2.09 million a year earlier, as Northrop winds down the B-2 program due to massive cutbacks by Congress.

According to a poll conducted by First Call/Thomson Financial, analysts expected Northrop to post first-quarter earnings of only $1.86 a share.

Analysts cautioned that the company’s investments in pension funds accounted for its 45 percent growth in operating margins. Profit in the quarter included $150 million of pension income, an 81 percent increase from the amount a year earlier. Based on estimates, pension income could total $200 million in 2000.

“When a good chunk of that money is not coming from its core business, you have to be careful,” said Robert Friedman, an aerospace analyst at S & P; Equity Group in New York.

But officials say the future looks bright for Northrop’s core business. The company’s order backlog is expected to swell starting in the current quarter because of a recent contract to supply radar and other gear for 80 F-16s being built for the United Arab Emirates, Taft said.

Credit Suisse First Boston recently upgraded Northrop Grumman from “buy” to “strong buy.” Goldman Sachs & Co. issued an upgrade from “market perform” to “market outperform,” and SG Cowen Securities Corp. upgraded the stock from “buy” to “strong buy.”

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