Should You Buy Lockheed Martin Stock Over NOC?

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We believe Northrop Grumman stock (NYSE: NOC) is a better pick than its sector peer Lockheed Martin stock (NYSE: LMT), given its better prospects. Both stocks trade at the same valuation multiple of 1.8x trailing revenues. While Lockheed Martin has demonstrated better revenue growth among the two, Northrop Grumman is more profitable, as discussed below.

Looking at stock returns, both have underperformed vis-à-vis broader markets amid rising concerns over supply-chain issues and slowing economic growth. While LMT is down 6% this year, NOC is down 18%, and the S&P500 index is up 12%. There is more to the comparison, and in the sections below, we discuss why we believe that NOC will offer better returns than LMT in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Lockheed Martin vs. Northrop GrummanWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Lockheed Martin’s Revenue Growth Is Better 

  • Lockheed Martin’s revenue growth has been slightly better, with a 3.4% average annual growth rate in the last three years, compared to 2.8% for Northrop Grumman.
  • Lockheed Martin’s revenue growth over the recent years has been led by higher production volume for its Sikorsky helicopter programs, AC-3, Long Range Anti-Ship Missile (LRASM), and the Joint Air-to-Surface Standoff Missile (JASSM) program, among others.
  • Northrop Grumman’s revenue growth over the recent years can be attributed to its space segment, which has benefited from higher strategic missile sales. Notably, the company’s order backlog has seen steady growth in recent years, up from $65 billion in 2019 to $77 billion currently, driven by growing demand for space systems.
  • If we look at the last twelve-month period revenues, Northrop Grumman fares better with sales growth of 5.1% vs. 0.6% for Lockheed Martin.
  • Lockheed Martin is seeing a higher volume of production contracts for F-35 and the national security space program driving its sales growth, a trend expected to continue in the near term.
  • Northrop Grumman’s Defense Systems segment sales have declined in recent years. Although lifting the debt ceiling surely bodes well for defense stocks, there are still low-priority defense items that may go unfunded, per a media report. [1]
  • Our Lockheed Martin Revenue Comparison and Northrop Grumman Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Northrop Grumman’s revenue is expected to grow faster than Lockheed Martin’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 8.4% for Northrop Grumman, compared to a 6.0% CAGR for Lockheed Martin, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Northrop Grumman Is More Profitable

  • Lockheed Martin’s operating margin has slid from 13.3% in 2019 to 11.2% in 2022, while Northrop Grumman’s operating margin rose from 8.8% to 17.3% over this period.
  • Looking at the last twelve-month period, Northrop Grumman’s operating margin of 16.6% fares better than 11.3% for Lockheed Martin.
  • Our Lockheed Martin Operating Income Comparison and Northrop Grumman Operating Income Comparison dashboards have more details.
  • Lockheed Martin’s free cash flow margin of 12% is higher than 7% for Northrop Grumman.
  • Looking at financial risk, both are comparable. While Lockheed Martin’s 13% debt as a percentage of equity is lower than 20% for Northrop Grumman, its 5% cash as a percentage of assets is lower than 6% for the latter, implying that LMT has a better debt position, and NOC has more cash cushion.

3. The Net of It All

  • We see that Northrop Grumman is more profitable and has more cash cushion. On the other hand, Lockheed Martin has seen better revenue growth and has a better debt position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Northrop Grumman is the better choice of the two.
  • If we compare the current valuation multiples to the historical averages, both are comparable. Lockheed Martin’s stock is currently trading at 1.7x trailing revenues vs. the last five-year average of 1.6x and Northrop Grumman’s stock trades at 1.8x trailing revenues vs. the last five-year average of 1.7x.
  • Our Lockheed Martin (LMT) Valuation Ratios Comparison and Northrop Grumman (NOC) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 20% for Northrop Grumman over this period vs. a 14% expected return for Lockheed Martin, based on Trefis Machine Learning analysis – Lockheed Martin vs. Northrop Grumman – which also provides more details on how we arrive at these numbers.

While NOC may outperform LMT stock in the next three years, it is helpful to see how Lockheed Martin’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Cisco vs. Northrop Grumman.

With higher inflation and the Fed raising interest rates, among other factors, LMT stock has seen a fall of 6% this year. Can it drop more? See how low Lockheed Martin stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
LMT Return 3% -6% 83%
NOC Return 3% -18% 93%
S&P 500 Return 2% 12% 91%
Trefis Multi-Strategy Portfolio 5% 14% 260%

[1] Month-to-date and year-to-date as of 6/7/2023
[2] Cumulative total returns since the end of 2016

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Notes:
  1. US debt ceiling deal strands $16 billion of defense side-projects, Reuters, Mike Stone and Patricia Zengerle, Reuters, June 2, 2023 []