Northrop Grumman's 3rd Quarter: Beat, Raise and Record Backlog

A look inside the company's most recent quarter

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Oct 23, 2020
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Aerospace and defense company Northrop Grumman Corp. (

NOC, Financial) released earnings results for the third quarter on Oct. 22.

Adjusted earnings per share of $5.89 was a 7.3% increase from the previous year and 27 cents ahead of Wall Street analysts' expectations. Revenue improved 7.1% to $9.1 billion, $230 million higher than anticipated.

Northrop Grumman had growth in nearly every segment.

Aeronautics systems sales grew 5% to $2.91 billion. This segment saw increased demand for its manned aircraft and autonomous systems product lines. Higher volumes on restricted programs as well as E-2D and F-35 productions programs also contributed to results. The operating margin increased 40 basis points to 10.1%.

Missions systems revenue improved 10% to $2.55 billion as all businesses were higher from the prior year. Airborne sensors and networks benefited from increased demand for airborne radar. Volume gains for self-protection programs and targeting systems led to gains for the navigation, targeting and survivability business. Sales for maritime and land systems and sensors were up due to gains made in the marine systems program. Higher volumes for restricted programs led to growth in the cyber and intelligence business. The operating margin decreased 70 basis points to 14.5% due to timing of programs and contract mix for navigation, targeting and survivability program.

Space systems was the best-performing segment as revenue grew 17% to $2.2 billion. Space sales growth was driven by improved volumes on restricted programs as well as demand for infrared and NASA programs. Launch and strategic missiles benefited from higher volumes on launch vehicles and hypersonics. The operating margin of 10.2% was flat compared to the previous year.

Defense systems was the only segment to post a decline as sales fell 4% to $1.86 billion. Performance in mission readiness, battle management and missile systems led to the year-over-year declines. In each case, lower volumes as a result of programs nearing their completion were the primary reasons for weakness. On the other hand, several missile programs saw much higher demand. Despite the sales decline, the operating margin was up 130 basis points to 11.7%.

Operating income improved for each segment of the company and 10% overall to $1.05 billion. The operating margin was up 20 basis points to 11.5%. Free cash flow increased 22% to $1.07 billion.

Northrop Grumman had a strong book-to-bill ratio of 2.2. The company was awarded a net of more than $20 billion during the quarter. Included in these new awards was a $13.3 billion contract for the Ground Based Strategic Deterrent program, $1.9 billion in restricted programs and $0.9 billion for F-35 production. Year-to-date net awards totaled $43 billion.

The backlog swelled to a company record $81.3 billion. Based off last year's annual sales of $33.8 billion, it would take Northrop Grumman almost two and a half years to work off its backlog.

Northrop Grumman also updated its guidance for the remainder of the year. The company sees adjusted earnings of $22.25 to $22.65 per share for the year, up from $22 to $22.40 previously, on $35.7 billion to $36 billion in revenue, up from $35.3 billion to $35.6 billion previously. Sales for each segment are projected to be higher by at least high single-digits, led by Aeronautics.

Valuation and expected returns

Using the current share price of around $309 and the midpoint for expected earnings per share of $22.45, Northrop Grumman trades with a forward price-earnings ratio of 13.8. This is just about in-line with the 10-year average price-earnings ratio of 13.9, but well under the five-year average price-earnings ratio of 17.7 according to Value Line.

As I've stated previously, I feel a price-earnings target range of 15 to 17 times earnings is fair for Northrop Grumman given recent business results and general increases in spending on defense. Applying the new midpoint to this target range results in a price range of $337 to $382. This means that shares of the company could offer a return of 9% to 24% from the current share price.

This wouldn't include the dividend yield, which would be 1.7% at the low end and 1.5% at the high end of my price target range.

Investors could see at least double-digit returns if Northrop Grumman were to trade within my valuation range.

And this projection could be conservative. The GF Value chart shows that Northrop Grumman is trading below its intrinsic value.


As of today, Northrop Grumman has a GF Value of approximatetly $389, which equates to a price-to-GF Value ratio of 0.79. This earns the stock a rating of modestly undervalued from GuruFocus. Were Northrop Grumman's stock to trade at its intrinsic value, then shareholders could be looking at a gain of 26%.

Final thoughts

Northrop Grumman delivered a very strong third quarter. Earnings per share and revenue were both up at least 7% and came in ahead of the market's expectations. The company's business segments performed well for the most part and operating margins improved overall. Northrop Grumman's book-to-bill ratio was very high and the backlog reached a new record.

Not only were recent results good, shares of Northrop Grumman appear to be undervalued. The stock's yield might be below 2%, but the company has raised its dividend for the past 17 years. Northrop Grumman has compounded its dividend at a rate of almost 11% over the last decade.

Due to business results and potential returns, I remain bullish on Northrop Grumman. I continue to believe that the stock can be bought at the current price by those looking for exposure to the aerospace and defense sector

Disclosure: The author has no position in any stocks mentioned in this article.

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