We came across a bullish thesis on Northrop Grumman Corporation (NOC) on Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on NOC. Northrop Grumman Corporation (NOC)’s share was trading at $490.72 as of March 21st. NOC’s trailing and forward P/E were 17.32 and 17.48 respectively according to Yahoo Finance.
Copyright: scanrail / 123RF Stock Photo
Northrop Grumman (NOC) stands as one of the world’s largest defense contractors, generating over $40 billion in revenue, with 87% coming from long-term Pentagon programs and the rest from military exports and NASA contracts. Operating across Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems, Northrop is a leader in cutting-edge defense technologies, including the B-21 Raider stealth bomber, unmanned aerial systems, missile defense solutions, and space exploration components for NASA. The company’s innovative edge sets it apart, providing crucial systems for the F-35 fighter jet and pioneering projects like the James Webb Space Telescope.
Despite recent market turbulence, Northrop has outperformed, benefiting from global conflicts and the defensive nature of its business. Shares have remained largely stable since early 2022 and currently trade 10% below their all-time high, reflecting investor caution after light guidance and political uncertainties surrounding defense budgets. However, the company continues to execute well, with 2024 sales growing 4%, operating income surging 65%, and free cash flow expanding 25%. Moreover, the long-term outlook remains highly favorable, driven by rising global defense spending. European nations are ramping up military budgets, with initiatives like Germany’s multi-billion-euro defense package and NATO’s heightened spending commitments. The broader defense industry is projected to grow at an 8.2% CAGR through 2030, and Northrop, as a premier contractor, is well-positioned to benefit.
Northrop’s backlog of $91.5 billion, more than twice its annual revenue, underscores strong demand for its products. A book-to-bill ratio of 1.23 signals that new orders outpace sales, with international demand particularly strong at 1.4. This backlog ensures steady revenue growth, while margin expansion—especially as the high-cost B-21 program transitions into production—should drive significant profit gains. Free cash flow is expected to grow at a 14% CAGR through 2027, the highest among major defense firms.
The company’s capital allocation strategy further enhances its appeal. Northrop prioritizes shareholder returns, committing to distributing 100% of free cash flow via dividends and share buybacks. It has grown dividends for 21 consecutive years at an 11% CAGR since 2015 while maintaining a conservative 31% payout ratio. Additionally, aggressive share repurchases have reduced the share count by 27% since 2015, amplifying earnings growth. With expanding margins and robust capital returns, Northrop’s EPS is set to compound at a high-single-digit rate.
Despite these strengths, Wall Street’s current tech focus has left Northrop undervalued relative to its long-term potential. Trading at 17.5x forward earnings with strong cash flow growth, the stock offers a compelling entry point for long-term investors seeking exposure to the growing defense sector.
Northrop Grumman Corporation (NOC) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 54 hedge fund portfolios held NOC at the end of the fourth quarter which was 48 in the previous quarter. While we acknowledge the risk and potential of NOC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NOC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.