It's been a great afternoon session for Northrop Grumman investors, who saw their shares rise 2.2% to a price of $462.58 per share. At these higher prices, is the company still fairly valued? If you are thinking about investing, make sure to check the company's fundamentals before making a decision.
Northrop Grumman's Valuation Is in Line With Its Sector Averages:
Northrop Grumman Corporation operates as an aerospace and defense technology company in the United States, Asia/Pacific, Europe, and internationally. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 22.19 and an average price to book (P/B) ratio of 4.06. In contrast, Northrop Grumman has a trailing 12 month P/E ratio of 34.2 and a P/B ratio of 4.69.
When we divideNorthrop Grumman's P/E ratio by its expected five-year EPS growth rate, we obtain a PEG ratio of 0.62, which indicates that the market is undervaluing the company's projected growth (a PEG ratio of 1 indicates a fairly valued company). Your analysis of the stock shouldn't end here. Rather, a good PEG ratio should alert you that it may be worthwhile to take a closer look at the stock.
Increasing Revenues but Narrowing Margins:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (M) | $30,095 | $33,841 | $36,799 | $35,667 | $36,602 | $39,290 |
| Operating Margins | 13% | 12% | 11% | 16% | 10% | 6% |
| Net Margins | 11% | 7% | 9% | 20% | 13% | 5% |
| Net Income (M) | $3,229 | $2,248 | $3,189 | $7,005 | $4,896 | $2,056 |
| Net Interest Expense (M) | $562 | $528 | $593 | $556 | $506 | $545 |
| Depreciation & Amort. (M) | $800 | $1,265 | $1,267 | $1,239 | $1,342 | $1,338 |
| Diluted Shares (M) | 173 | 168 | 167 | 161 | 156 | 152 |
| Earnings Per Share | $18.49 | $13.22 | $19.03 | $43.54 | $31.47 | $13.53 |
| EPS Growth | n/a | -28.5% | 43.95% | 128.8% | -27.72% | -57.01% |
| Avg. Price | $286.99 | $299.74 | $310.92 | $338.69 | $429.64 | $462.58 |
| P/E Ratio | 15.44 | 22.57 | 16.3 | 7.75 | 13.59 | 34.09 |
| Free Cash Flow (M) | $2,578 | $3,033 | $2,885 | $2,152 | $1,466 | $2,100 |
| CAPEX (M) | $1,249 | $1,264 | $1,420 | $1,415 | $1,435 | $1,775 |
| EV / EBITDA | 16.63 | 14.17 | 14.34 | 11.39 | 18.04 | 24.6 |
| Total Debt (M) | $27,766 | $25,540 | $29,264 | $25,560 | $24,682 | $27,642 |
| Net Debt / EBITDA | 5.72 | 4.45 | 4.57 | 3.2 | 4.47 | 6.33 |
| Current Ratio | 1.17 | 1.13 | 1.6 | 1.3 | 1.08 | 1.15 |
Northrop Grumman's financial statements include several red flags such as weak operating margins with a negative growth trend, declining EPS growth, and positive cash flows. Additionally, the firm has a highly leveraged balance sheet. On the other hand, the company has growing revenues and increasing reinvestment in the business working in its favor. Furthermore, Northrop Grumman has just enough current assets to cover current liabilities, as shown by its current ratio of 1.15.
