About Northrop Grumman

Northrop Grumman is a global defense giant. They hold a grip in various segments and related industries. Some of these industries include aerospace, spacecraft, radar, and cybersecurity equipment. 

Given the secretive nature of their work, Northrop Grumman requires most employees to gain a security clearance from the United States government. While on the topic of the U.S. government, the company does a lot of business with the United States military and government.  

In the past Northrop Grumman has and still performs ballistic missile testing and systems integration for the military. 

Whenever a company can gain contracts from the United States government, they tend to be compensated well and have a customer for life.  

However, assumptions be darned, let’s look at Northrop’s numbers.

Northrop Grumman’s stock financials 

Let’s see if Northrop’s financials are as stable as their government contracts. 

Northrop Grumman’s stock (NYSE: NOC) currently trades at a relatively pricey $487. At MacroHint, however, we don’t care about stock price alone.  

We care about the intrinsic value and overall valuation of the companies we analyze. Is the high-priced stock worth its weight in value? 

First, Northrop Grumman is a $75 billion company with approximately $42.5 billion in total assets and nearly $29.6 billion in total liabilities. It’s a positive that the company seems to have sufficient asset to liabilities coverage. Another major positive for current and prospective investors is the company’s current price-to-earnings (P/E) ratio.  

While above 20 is said to indicate that a stock is overvalued or not worth its weight in price, Northrop Grumman’s current P/E ratio sits at 13.51.  

This calls for a fundamental lesson involving price and value.

At first blush, the share price is high and investors might instantly assume that the stock is inflated and that they should wait until it comes back to earth, unlike some of Northrop’s high-tech space equipment. 

We don’t believe this is the case for Northrop Grumman. 

As can be gathered by their current P/E ratio and other metrics we will be discussing shortly, though Northrop’s current share price is on the higher end, the stock seems to actually be undervalued. 

What’s the lesson?

High price doesn’t necessarily equate to a stock being overvalued. 

For example, throughout the past handful of quarters of COVID-19 chaos, the company has maintained a steady stream of net income and total cash from investing activities. From a strict, singular valuation perspective, however, is Northrop Grumman all that? 

Yep. 

Their current P/E ratio is generally lower than the competition’s average (such as major competitor, Lockheed Martin) and their annual price-to-sales ratio seems to be on the lower end as well. We’d also like to briefly add that the company pays shareholders a rather attractively high annual dividend of $6.92.

Dividend and ratios aside, what’s a decent valuation without the ability to turn a profit? 

Thankfully, Northrop Grumman can do that too. 

Northrop Grumman’s stock fundamentals

Specifically, their annual gross profit margin sits above the industry’s average at nearly 21%. Additionally, they maintain a strong operating profit margin of 10.4% compared to the industry’s -28.97%. If that wasn’t good enough, Northrop maintains an annual net profit margin of 16.23% to the industry average’s -25.01%. 

The company also seems intent on nabbing a return on their investments.  

For example, the company’s annual return on investment(s) is over 10% higher than the industry average and their annual return on assets is more than 8% higher than the industry average as well. 

Finally, while some might see the company’s total assets and total liabilities as being a little too close for comfort (we did initially),  we don’t anticipate Northrop having any major issues paying down their debt over time given the nature of the industry they operate and dominate in.

Their lines of business (military aerospace, technology, spacecraft etc…) are debt-heavy by nature. However, with the assurance of predictable current and future contracts their ability to profit from their assets and investments (and their competitive margins), we’re confident in their ability to pay down debt.

Suffice it to say, the corporation’s overall ability to churn a profit should help investors sleep like babies knowing their hard-earned dollars are invested in Northrop Grumman.  

Northrop Grumman’s outlook 

Through virus calamities and financial collapses, Northrop Grumman, alongside with its defense counterparts have performed well during times of turmoil.  

This is one of our favorite parts of the types of businesses Northrop Grumman leads. 

Their naturally recession-proof nature of business paired with the retention of contracts with the United States government is an investor’s dream. 

While history by no means has a 1:1 correlation to what the future holds, Northrop has been well-managed in past years (and decades) and we don’t see many reasons why any of that should or will change. 

Should you buy Northrop Grumman stock?

Given the defense contractor’s solid financials, undervalued shared price, recession-proof nature, ability to produce a profit, and competitive historical shareholder returns compared to formidable competitors such as Boeing and Lockheed Martin, we see blue skies ahead for Northrop Grumman. 

We currently give the company a “buy” rating. 

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.