Northrop Grumman (NOC) *contact for tearsheet*
Continuing in the aerospace and defense industry, Northrop has been drilled by concerns that defense spending in the U.S. will come under pressure. However, the budget actually calls for 4 percent annual increases in defense spending over the next few years.
Northrop is well diversified and has an order backlog of $78 billion, providing the company with nice visibility into the future. The company also may benefit from a budget provision to spend hundreds of millions on a satellite system to monitor climate change – something the company has been working on for years.
Northrop also hopes to win the Air Force’s $35 billion contract to build aerial refueling tankers – again. Northrop and EADS, actually won this contract in 2008, but Boeing pressed to reopen bidding in 2009 citing unfair practices. Northrop remains convinced it has a better plane and will eventually prevail.
Like other defense companies, shares of Northrop are trading at a significant discount to the market, while sporting an attractive dividend and potential for strong earnings growth.
WellPoint (WLP) -1.21%
Reports surfaced last week that WellPoint placed its pharmacy benefits management (PBM) business up for sale. WellPoint’s PBM business, NextRx, is the fourth largest PBM in the U.S. with 32 million members. NextRx filled about 268 million prescriptions last year, and the business represents about 6 percent to 8 percent of WellPoint’s earnings.
The sale could be valued between $2 billion and $5 billion, depending on how a deal is structured. How long WellPoint would commit to having the PBM continue to manage its members’ prescription-drug benefits, and under what terms, would heavily influence a deal’s value. Discussions are early, but Express Scripts (ESRX) is considered the frontrunner with Medco and Walgreen may also show interest.
Acquiring NextRx would give a big stand-alone PBM like Express Scripts more negotiating power with drug prices and more room to expand its lucrative mail-order pharmacy business. Only about 10 percent of NextRx’s prescriptions are filled by mail order instead of at retail pharmacies, compared with as much as 40 percent of all prescriptions at the bigger PBMs.
General Electric (GE) +4.96%
GE shares were up after analysts said big write-offs are unlikely. The biggest controversy surrounding for the company right now is the fair value of GE Capital’s balance sheet. The company hopes to clear the air when they open up GE Capital’s balance sheet at an investor conference on March 16.
It was reported today that GE is selling $8 billion of government-backed bonds as debt investors speculate the finance unit will need to raise more capital.
Johnson & Johnson (JNJ) -2.86%
Merck's $41.1 billion takeover Schering-Plough seems fine and dandy, but it’s complicated by a long-standing distribution agreement between Schering and J&J. The agreement specifies that if Schering-Plough were acquired, J&J would have the right to cancel the agreement and take full control of the drugs – and the billions they generate.
In Monday’s conference call, Merck said that rights to the two drugs would remain safely with the combined company even though it was Merck that was taking over Schering-Plough and paying a premium to Schering’s shareholders.
Merck is calling the deal a “reverse merger,” so that the surviving parent company will be the existing Schering-Plough corporate entity. That company will be renamed Merck and led by Merck management, but won’t technically be the “old Merck” in the eyes of the law.
The agreement between J&J and Schering-Plough provides for mandatory binding arbitration in the event of a dispute, which means that a court battle is unlikely. Of course, there’s always the possibility that J&J might decide to skip the arbitration and make a play for Schering-Plough itself.
Quick Hits
- Someday, People Will Invest Again
- Depression Dynamic Ensues as Markets Revisit 1930s
- Ivory Tower Unswayed by Crashing Economy
- Credit Conditions
Peter Lazaroff, Junior Analyst
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