Pick Boeing Stock Over Northrop Grumman For Near-Term Gains

by Trefis Team
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Northrop Grumman stock (NYSE: NOC) has recovered to pre-Covid levels, while competitor Boeing’s stock (NYSE: BA) remains 30% below its pre-Covid peak. Both companies have a sizable order backlog that can sustain revenues for more than two years. At the same time, multi-year government contracts safeguard long-term shareholder returns for both companies despite the uncertain timeline of macroeconomic recovery. While the U.S. government contributes less to Boeing’s top line than Northrop Grumman’s, we believe that Boeing stock is currently poised for stronger gains in the near term. The primary reason for our belief is the fact that the loss of $55 billion in Boeing’s market capitalization since early last year is unjustifiably more than the company’s $7.5-billion operating cash outflow in 2020 (excluding the impact of an $11 billion increase in inventories). The easing of inventory levels and resumption of MAX production are key triggers for a sizable upside in Boeing stock.

Northrop Grumman is a prominent aerospace & defense company and offers innovative systems and solutions for multiple areas, including space, hypersonics, cyber, communications, surveillance, logistics, etc. Boeing is the leading manufacturer of 100+ seat aircraft for the global commercial airplane industry, with a strong presence in the defense contracting business. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, BA vs. NOC: Is BA Stock Appropriately Valued Compared to NOC

1. Revenue Growth

Northrop Grumman’s revenues have grown consistently over the last three years at an average rate of 12% per year, from $26 billion in 2017 to $36.8 billion in 2020. On the other hand, Boeing’s top line declined by 24%, from $76.5 billion in 2019 to $58 billion in 2020 due to a slump in travel demand and the grounding of MAX. But we expect Boeing’s Revenues to rebound sharply over the coming years.

  • Northrop Grumman’s four operating segments, Aeronautics, Defense, Mission, and Space, contribute 32%, 20%, 26%, and 23% of total revenues, respectively. The company’s Aeronautics and Space segments have observed strong growth in recent years driven by manned & autonomous aircraft systems and strategic missile sales, respectively. Notably, the company’s order backlog almost doubled in recent years, from $42 billion in 2017 to $80 billion in 2020, assisted by a rising defense budget and high demand for space systems.
  • Boeing’s three operating segments, Commercial Airplanes, Defense, and Global Services, contribute 57%, 26%, and 17% of total revenues, respectively. Despite a steep decline in the Commercial Aviation segment due to the grounding of MAX and the pandemic, the Defense & Space segment has been reporting promising numbers over the years. Per recent filings, the company’s order backlog still stands tall at $364 billion.

2. Returns (Profits)

Northrop Grumman and Boeing reported similar operating profit margins in the 10-14% range before the MAX crisis in 2019. Notably, the operating cash flow margin has also been similar – indicating an equal prowess of returning capital to shareholders.

  • In 2020, Northrop Grumman’s four operating segments, Aeronautics, Defense, Mission, and Space, reported an operating margin of 10%, 11%, 14%, and 10%, respectively. The company’s Aeronautics and Mission segments have been key earnings drivers over the years.
  • Before the MAX crisis, Boeing’s three operating segments, Commercial Airplanes, Defense, and Global Services, reported an operating margin of 14%, 7%, and 15%, respectively. Due to the suspension of MAX’s production, the Defense segment has been supporting earnings for the last two years.

3. Risk

Per annual filings, Northrop Grumman and Boeing reported $14 billion and $62 billion of long-term debt, respectively. The 450-plane inventory on Boeing’s balance sheet has been key to the surge in its long-term debt from $20 billion in 2019 to $62 billion in 2020.

  • Revenue expansion has assisted regular operating cash generation, dividend payouts, and share repurchases by Northrop Grumman.
  • Since 2018, Northrop Grumman’s dividend per share has increased by 20% – highlighting a strong focus on capital return to shareholders.
  • Additionally, NOC stock has a lower downside risk than Boeing as the U.S. government contributes around 85% of the company’s top line.
  • Notably, Boeing’s inventories observed a $20 billion jump from $62.5 billion in 2018 to $82 billion in 2020. As the balance sheet holds $25 billion of cash and short-term investments, a major portion of the $62 billion long-term debt is due to high inventory levels.

Is there a better pick over Boeing in the defense contracting business? Boeing Stock Comparison With Peers summarizes how BA compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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