Defense Industry Stocks: Lockheed Martin Over Northrop Grumman?

by Trefis Team
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The shares of Northrop Grumman (NYSE: NOC) have almost recovered to pre-Covid levels while the shares of its competitor Lockheed Martin (NYSE: LMT) remain 13% below February 2020 highs. While both companies have a similar risk-return profile, Trefis believes that Lockheed Martin remains a good pick due to a high current dividend yield and likelihood of near-term gains.  More so, the U.S. government has agreed to take delivery of 133-139 aircraft and 151-153 F-35 aircraft in 2022 and 2023, respectively – higher than pre-Covid levels.  Lockheed Martin and Northrop Grumman are prominent military contractors of the U.S. government and provide design, development, and manufacturing of aircraft, missiles, combat vehicles, advanced weapon systems, and associated services. Despite the uncertainty surrounding macroeconomic recovery, both company’s strong order backlog and multi-year government contracts safeguard long-term shareholder returns. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Lockheed Martin vs Northrop Grumman: Industry Peers; Which Stock Is A Better Bet?

1. Revenue Growth

Lockheed Martin’s growth has been similar to Northrop Grumman’s over the last three years, with LMT’s revenue expanding at an average rate of 10% per year from $50 billion in 2017 to $65.4 billion in 2020, versus NOC’s revenue at an average rate of 12% per year from $26 billion in 2017 to $36.8 billion in 2020.

  • 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, pushed by growing demand for space systems.
  • Lockheed Martin’s four operating segments, Aviation, Missiles, Rotary Systems, and Space contribute 40%, 17%, 25%, and 18% of the total revenues, respectively. With the acquisition of Aerojet Rocketdyne, LMT’s Space and Missiles & Fire Control divisions are likely to observe topline growth in the coming years. Moreover, LMT’s order backlog increased by $42 billion from $105 billion in 2017 to $147 billion in 2020. (related: A Closer Look At Lockheed Martin’s Key Military Programs)

2. Returns (Profits)

Lockheed’s operating profit margin has also remained similar to Northrop Grumman – leading to a comparable operating cash flow margin and dividend payout ratio.

  • In 2020, Northrop Grumman’s four operating segments, Aeronautics, Defense, Mission, and Space segments 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.
  • LMT’s Aeronautics, Missiles & Fire Control, Rotary & Mission Systems, and Space segments reported an operating margin of 11%, 14%, 10%, and 10%, respectively. As the F-35 program contributes nearly 27% of LMT’s total revenues, the Aeronautics segment has been key to earnings expansion.
  • Despite concerns of a slow macroeconomic recovery and aid packages making a dent on government finances, Lockheed Martin and Northrop Grumman’s top line is likely to expand at a single-digit rate in 2021. (related: Lockheed Martin Stock A Value?)

3. Risk

Per 2020 filings, Lockheed Martin and Northrop Grumman reported $12 billion and $14 billion of long-term debt, respectively.

  • Continued revenue growth has led to consistent cash generation, dividend payouts, and share repurchases by Lockheed Martin and Northrop Grumman.
  • Both LMT and NOC’s dividend per share increased by 20% since 2018.
  • Moreover, the U.S. government contributes around 70% and 85% of LMT and NOC’s top line, respectively.
  • Given NOC’s higher debt to asset ratio and comparable top line growth expectations, NOC stock faces a greater downside risk.

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