Northrop Grumman announced a $3 billion share repurchase program just two weeks ago. Its stock price has been going down since then. The market is giving clear indications that if the company wants to attract investors and reward existing shareholders, it will have to do a little more than that.
Northrop Grumman Corp is a leading aerospace and defense technology company that integrates cutting-edge technologies to provide comprehensive solutions that address complex global security challenges.
The company offers unmanned aerial vehicles for surveillance (Global Hawk UAV), advanced aircraft (B-21 Raider), cybersecurity solutions to protect military networks and systems, military radar systems, missile defense systems, and C4ISR systems.
Northrop Grumman was primarily responsible for the design and construction of the James Webb Space Telescope, the largest and most powerful space telescope ever built. More interestingly, the company played a crucial role in developing the Apollo Lunar Module.
The space systems division is the largest contributor, generating approximately 35% of total revenue. Aeronautic systems contribute roughly 26%. Mission systems add 22%, and defense systems account for about 16%. The company generates approximately 88% of its total revenue from the United States, with the U.S. Department of Defense, U.S. Army, U.S. Air Force, and U.S. Navy being its top clients.
Northrop Grumman’s rich history of services to the US technological infrastructure makes it a solid company. However, investors haven’t been impressed by its poor returns, with the stock up only 34% in the last 5 years compared to the S&P 500’s 116%. Despite showing a 2.6% YoY growth in the third quarter this year, the company’s upside potential seems limited.
The company is a beneficiary of increased defense spending in the wake of geopolitical conflicts. This increase in spending seemed to have been priced in by Wall Street. The market also seems to be on the edge regarding China. If the company is adversely affected by a ban on exporting minerals from China, its margins could drop by as much as 11%! But this could be offset by the first margin expansion in years, also by 11%.
The company seems to be doing a lot of things right but still has a lot going against it. This juggling act is made possible by a positive free cash flow for 20 years. The company is on track to generate an FCF of $2.45 billion this year. However, the stock again doesn’t seem to respect this. It may take a much lower valuation than what the company currently commands for investors to step in and bet on a value play. For now, Northrop Grumman’s stock is not going anywhere, not even with the share repurchase program.
Northrop Grumman is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 48 hedge fund portfolios held NOC at the end of the third quarter which was 49 in the previous quarter. While we acknowledge the potential of NOC as a leading 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 as promising as 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 was originally published at Insider Monkey.
