Where Do Investors See Value in Northrop Grumman Shares?

Aerospace & Defense company Northrop Grumman fell to $492.7 on Friday, marking a -7.3% change compared to the S&P 500, which moved 1.0%. NOC is -11.06% below its average analyst target price of $553.95, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Northrop Grumman shares have outstripped the S&P 500 by 51.6%, with a price change of 36.9%.

Northrop Grumman Corporation operates as an aerospace and defense company worldwide. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.

Northrop Grumman's trailing 12 month P/E ratio is 14.1, based on its trailing Eps of $35.05. The company has a forward P/E ratio of 21.6 according to its forward Eps of $22.85 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the industrials sector has an average P/E ratio of 21.46, and the average for the S&P 500 is 15.97.

To better understand NOC’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Northrop Grumman’s PEG is 7.19, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Northrop Grumman's gross profit margin trends:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2021-12-31 35,667,000,000.0 28,399,000,000.0 20.38 0.3
2020-12-31 36,799,000,000.0 29,321,000,000.0 20.32 -5.27
2019-12-31 33,841,000,000.0 26,582,000,000.0 21.45 -5.34
2018-12-31 30,095,000,000.0 23,275,000,000.0 22.66 n/a
  • Average gross margin: 21.2 %
  • Average gross margin growth rate: -3.4 %
  • Coefficient of variability (lower numbers indicating more stability): 5.2 %

Northrop Grumman's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Northrop Grumman was $2,152,000,000.00 as of its last annual report.

Over the last 4 years, the company's average free cash flow has been $2,662,000,000.00 and they've been growing at an average rate of -4.2%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in NOC have received an annualized dividend yield of 1.2% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Northrop grumman's P/B ratio is 5.4 -- in other words, the market value of the company exceeds its book value by a factor of more than 5, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.7 as of the third quarter of 2022.

Since it has a very low P/E ratio, an elevated P/B ratio, and a steady stream of strong cash flows, Northrop Grumman is likely fairly valued at today's prices. The company has mixed growth indicators because of an inflated PEG ratio yet sustainable gross margins. We hope you enjoyed this overview of NOC's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.