Is There More Upside For Northrop Grumman Stock?

Northrop Grumman stock (NYSE: NOC) has seen a 24% rise this year, significantly outperforming the broader S&P500 index, down 23%. Even if we look at the longer term, NOC stock, with 56% returns from levels seen in late 2017, has fared better than the S&P 500 index, up 38%. NOC stock now looks fairly valued at levels of around $480, as discussed below.

This 56% rise for NOC stock since late 2017 can primarily be attributed to 1. Northrop Grumman’s revenue rising 34% to $35.0 billion over the last twelve months, compared to $26.0 billion in 2017, 2. a 17% rise in the company’s P/S ratio to 2.1x trailing revenues currently, compared to 1.8x in 2017, and 3. an 11% fall in its total shares outstanding to 155 million, driven by $6.8 billion spent on share repurchases over this period. The increase in revenue and a fall in shares outstanding has meant that Northrop Grumman’s revenue per share rose 51% to $225 over the last twelve months, vs. $149 in 2017. Our dashboard on Why Northrop Grumman Stock Moved has more details.

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 almost doubled in recent years, from $42 billion in 2017 to $80 billion currently, driven by growing demand for space systems.

Defense stocks at large have fared well this year, given the ongoing Ukraine-Russia conflict. New business awards with a likely increased defense spending, especially by NATO members, will bode well for Northrop Grumman. However, the company faces headwinds due to supply chain disruptions and rising costs. That said, Northrop Grumman has seen a steady rise in its operating margin from 18.5% in 2017 to 28.1% in 2021, before falling to 22.9% over the last twelve months. Our Northrop Grumman Operating Income dashboard has more details.

Given the near-term headwinds, Northrop Grumman is expected to see only a 2% top-line growth this year to over $36.3 billion (per the consensus estimate). Assuming the current share count of 155 million (reported for Q2 2022), we arrive at the expected revenue per share of $234 for the full year 2022. At its current levels, NOC stock is trading at 2.0x forward expected revenues, compared to the last three-year average of 1.7x. Now, given the Russia-Ukraine conflict and an anticipated rise in defense spending, an upward revision in trading multiple makes sense. However, now that NOC stock has already rallied 24% this year, and its P/S multiple is higher than the historical average, we don’t expect significant growth from the current levels.

While NOC stock looks appropriately priced, it is helpful to see how Northrop Grumman’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 Textron vs. Aaron’s.

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[1] Month-to-date and year-to-date as of 9/26/2022
[2] Cumulative total returns since the end of 2016

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