This Aerospace Components Maker Appears To Be A Better Pick Over Northrop Grumman Stock

NOC: Northrop Grumman logo
Northrop Grumman

We believe that Transdigm stock (NYSE: TDG), an aerospace components company, currently is a better pick compared to Northrop Grumman stock (NYSE: NOC), despite its higher valuation of 5.4x trailing revenues vs. 2.1x for Northrop Grumman. This gap in the valuation can partly be attributed to Transdigm’s superior revenue growth and better prospects, as discussed below.

If we look at stock returns, Northrop Grumman, with a 25% rise year-to-date, has outperformed Transdigm, down 13%, as well as the broader markets, with the S&P500 index falling 21%. There is more to the comparison, and in the sections below, we discuss why we believe TDG stock will offer better returns than NOC stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Northrop Grumman vs. TransdigmWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Transdigm’s Revenue Growth Is Better

  • Transdigm’s sales growth of 10.8% over the last twelve months is much better than -7.0% for Northrop Grumman.
  • Even if we look at a longer time frame, Transdigm has outperformed, with its sales seeing an average growth rate of 9.6% to $4.8 billion in 2021, compared to $3.8 billion in 2018, while Northrop Grumman saw its revenue rise to an average growth rate of 6.0% to $35.7 billion in 2021, compared to $30.1 billion in 2018.
  • Northrop Grumman’s space segment has observed strong growth in recent years driven by 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.
  • Transdigm reports its revenue under three segments – Power & Control, Airframe, and Non-Aviation. Power & Control and Airframe segments have observed strong growth in recent years, primarily driven by pent-up demand from defense customers.
  • The revenue growth is also bolstered by acquisitions, including DART Aerospace and Cobham Aero Connectivity.
  • Its OEM sales trended lower in fiscal 2021 due to the impact of the pandemic on the commercial airplanes industry.
  • Given the recovery in travel demand, OEM sales have trended higher in recent quarters, but supply chain disruptions have weighed on its defense business.
  • The ongoing Ukraine-Russia conflict has increased focus on the defense sector stocks. New business awards will likely drive the performance of defense-related companies n the near term, with possible increased defense spending, especially by NATO members.
  • Our Northrop Grumman Revenue and Transdigm Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Transdigm’s revenue is expected to grow faster than Northrop Grumman’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 19.0% CAGR for Transdigm, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 forecast 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

  • Transdigm’s current operating margin of 19.6% is slightly lower than 22.9% for Northrop Grumman.
  • This compares with 20.3% and 10.3% figures in 2019, before the pandemic.
  • Transdigm’s free cash flow margin of 18.5% is better than 5.5% for Northrop Grumman.
  • Our Transdigm Operating Income and Northrop Grumman Operating Income dashboards have more details.
  • Looking at financial risk, Transdigm’s 71.1% debt as a percentage of equity is much higher than 17.1% for Northrop Grumman, while its 20.2% cash as a percentage of assets is higher than 2.8% for the latter, implying that Northrop Grumman has a better debt position while Transdigm has more cash cushion.

3. The Net of It All

  • We see that Transdigm has demonstrated better revenue growth, and has more cash cushion. On the other hand, Northrop Grumman is more profitable, has a better debt position, and it available at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Transdigm is currently the better choice of the two, despite its higher valuation.
  • The table below summarizes our revenue and return expectations for the two companies over the next three years and points to an expected return of 59% for Transdigm over this period vs. a 9% expected return for Northrop Grumman, implying that investors will likely be better off choosing TDG over NOC, based on Trefis Machine Learning analysis – Northrop Grumman vs. Transdigm – which also provides more details on how we arrive at these numbers.

While TDG may outperform NOC, 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 by how counter-intuitive the stock valuation is for Marine Products vs. Amerco.

Despite higher inflation and the Fed raising interest rates, Northrop Grumman is up 25% this year. But can it drop from here? See how low can Northrop Grumman stock 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? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Oct 2022
MTD [1]
YTD [1]
Total [2]
NOC Return 3% 25% 108%
TDG Return 5% -13% 122%
S&P 500 Return 6% -21% 69%
Trefis Multi-Strategy Portfolio 7% -21% 212%

[1] Month-to-date and year-to-date as of 10/6/2022
[2] Cumulative total returns since the end of 2016

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