We recently compiled a list of the 10 Undervalued Aerospace Stocks To Buy According to Analysts. In this article, we are going to take a look at where Northrop Grumman Corporation (NYSE:NOC) stands against the other undervalued aerospace stocks.
The International Aerospace and Defense industry
The aerospace and defense industry is a fast-growing industry, mainly because of the increased global travel after the pandemic and increased geopolitical tensions, which has led to increased government spending on defense. According to Research and Markets, the global aerospace and defense industry was valued at $884 billion in 2023. The industry is expected to grow at a compound annual growth rate of 5.8% to reach $1.23 trillion by 2028. Growth in the sector pertains to the rise in military modernization and increased defense spending. Whereas, increased spending on air travel is contributing to the growth in the commercial aerospace industry.
Geopolitics and Increased Spending on Defense
The world has been in a straight of turmoil, with geopolitical tensions leading to wars. While war and geo-political tensions are a dealbreaker for many industries, for the aerospace and defense companies the story is different. One of the key drivers of revenue for such companies is government contracts for military-grade aircraft, weapons, and defense systems. Thereby, with increased risks of war, defense spending goes up and aerospace and defense companies land more contracts.
According to a report by CNBC on April 22, global military spending hit an all-time high in 2023 after a 7% ramp-up. The global military spending was at a record high of $2.4 trillion last year. One of the key drivers of increased defense spending has been the prolonged Russia-Ukraine conflict and the recent tensions between Israel and Palestine. During the previous year the United States, China, and Russia were noted to be the biggest military spenders.
According to the U.S. Department of Defense, the government has $2.09 trillion in budgetary resources and plans to spend $972.88 Billion during 2024, out of which $229.80 billion is designated for award obligations. This indicates increased business opportunities for aerospace and defense companies during the year.
Upcoming Trends in the Aerospace Industry
According to a survey conducted by McKinsey & Company, AI-powered advancements can reshape aircraft maintenance, repair, and overhaul, however, companies need to accept the digital transformation.
Aircraft fleet management is a challenging sector. In the US alone, airline companies have witnessed a 15% increase in maintenance costs during the past 5 years. Moreover, there has been a 14% increase in flight delays due to maintenance.
The maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that allow better performance and improve efficiency. For Instance, AI-powered MRO can predict proper maintenance needs for an aircraft and the labor, material, and time needed for the maintenance. However, to leverage the power of AI, maintenance companies would have to become comfortable with adapting to new technologies and deal with the status quo disruption. The survey by McKinsey & Company found that only 33% of their respondents believed digital adoption to be critically important in achieving organizational objectives. Whereas 70% believed it could become critically important in the next 3 to 5 years, indicating hesitation towards immediate adoption of AI-powered solutions in the MRO sector.
Our Methodology
To compile the list of 10 undervalued aerospace stocks to buy according to analysts we used the Finviz stock screener and iShares U.S. Aerospace & Defense ETF. We aggregated a list of stocks that operated in the aerospace and defense industry and filtered stocks that had a forward P/E ratio of less than 22 and a positive earnings growth rate. These stocks are cheaper than the market, which currently has a forward P/E of 22 (according to data from WSJ).
Once we had our filtered list, we ranked these stocks based on the average price target upside as per Wall Street analysts. The stocks are ranked in ascending order of the average price target upside as of August 15, 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aeronautics engineer inspecting a model aircraft engine in a factory setting.
Northrop Grumman Corporation (NYSE:NOC)
Average Price Target Upside as of August 15: 1.39%
Forward P/E as of August 15: 20
Northrop Grumman Corporation (NYSE:NOC) is a leading aerospace and defense technology company, with a portfolio of Aeronautics Systems, Defence Systems, Mission Systems, and Space Systems. The defense premier company designs and manufactures an array of aerospace technology ranging from aircraft, and drone systems, to sophisticated satellites and missile systems. Its aviation technology and defense systems are sold to the US government and allies.
Defense and aerospace is a long-cycle business, where new products and projects can take years to generate revenue. However, Northrop Grumman Corporation (NYSE:NOC) has done well to align its business with the US government and its allies. The company has been developing the B-12 bomber and the Sentinel program, which is near completion and is expected to contribute significant growth.
Northrop Grumman Corporation (NYSE:NOC) posted a successful second quarter of 2024, with net sales increasing 7% year-over-year to $10.2 billion on the back of strong growth in all four segments. Aeronautics technology contributed the most to growth with net sales growing 14% year-over-year to reach $2.96 billion.
Not only has the company improved its net sales, but has a strong second-quarter backlog of $83.1 billion indicating sustained profitability. What’s more notable is Northrop Grumman Corporation’s (NYSE:NOC) ability to improve its operational income across all segments. The consolidated operating income for the quarter improved 5% to reach $1.1 billion.
As a result of improved performance across all business segments and a diverse portfolio of matured production programs ready to deliver revenue, the company has improved its 2024 guidance. Northrop Grumman Corporation (NYSE:NOC) now expects sales between $41.0 billion to $41.4 billion and adjusted EPS of $24.90 to $25.30.
Northrop Grumman Corporation (NYSE:NOC) is cheap at current levels. It is trading at 20 times its forward earnings, while the market forward P/E is 22. Moreover, the earnings of the company are also expected to grow 4% during the year to reach $6.48. 25 analysts have a consensus buy opinion on the stock with their 12-month median price target of $512 presenting an upside of 1.39% from the current level.
Carillon Eagle Growth & Income Fund stated the following regarding Northrop Grumman Corporation (NYSE:NOC) in its fourth quarter 2023 investor letter:
“Northrop Grumman Corporation (NYSE:NOC) pulled back in November following very strong performance in October that was tied to solid earnings and heightened geopolitical issues that included the war in Israel. While geopolitical issues remained front and center in November, tensions did not broaden to other areas through the end of the year.”
Overall NOC ranks 10th on our list of the best undervalued aerospace stocks to buy. While we acknowledge the potential of NOC as an investment, our conviction lies in the belief that 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.
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Disclosure: None. This article is originally published at Insider Monkey.