Recently, I discussed how Northrop Grumman Corp. (NOC, Financial) offered investors tremendous value due to a weak stock performance over the last year. Shares are down 17% over the last 12 months compared to an over 16% gain for the S&P 500 index.
Northrop Grumman has only marginally outperformed the U.S. Aerospace & Defense ETF (ITA, Financial) over this period of time.
After reviewing the company's most recent quarter, I continue to believe that investors purchasing shares of the aerospace and defense company are buying a stock trading below its intrinsic value. Patient investors could enjoy solid gains by buying Northrop Grumman today.
Earnings highlights
Northrop Grumman reported fourth-quarter and full-year earnings results on Jan. 28. For the quarter, revenue grew 17.1% to $10.21 billion, easily beating Wall Street analysts' estimates by almost $1 billion. Adjusted net earnings totaled $1.1 billion, or $6.59 per share, compared to $949 million, or $5.61 per share, in the prior year. Adjusted net earnings grew 16% while adjusted earnings per share were higher by 17.5%.
For the year, revenue increased 9% to $36.8 billion. Adjusted net earnings of $4 billion, or $23.65 per share, compared favorably to adjusted net earnings of $3.6 billion, or $21.21 per share, for 2019. Adjusted net earnings and adjusted earnings per share both improved approximately 11% year over year. Adjusted earnings per share topped the company's guidance of $22.45 given at the end of the third quarter.
Growth for Northrop Grumman was broad based, both for the quarter and year.
Aeronautics Systems grew 24% for the quarter to $3.5 billion. Manned Aircraft was the primary driver of growth, but the company also experienced higher demand for restricted programs and the E-2D, an early warning and command and control aircraft system. This was offset by lower volumes for the B-2 Defensive Management System modernization program as it nears completion. Operating margins fell 130 basis points to 9.7% and 80 basis points to 10.7% for the quarter and year, respectively, primarily due to the sale of equipment to a restricted customer.
Defense Systems was higher by 2% to $1.9 billion. Mission Readiness volumes were higher compared to the prior year, with growth seen in both restricted and international programs. Gains in these areas were offset by weakness in a program nearing completion. Volumes for the Guided Missile Launch Rocket System and Advanced Anti-Radiation Guided Missile products were especially strong. Quarterly operating margin increased 180 basis points to 11.2% while the operating margin for 2020 improved 60 basis points to 11.2%.
Mission Systems improved 10% to $2.7 billion as all business areas demonstrated growth compared to the prior year. Higher volumes for restricted programs, F-35 and other programs lifted Airborne Sensors & Networks while improving demand for targeting programs led to higher sales for Navigation, Targeting & Survivability. Maritime/Land Systems & Sensors benefited from increased volumes for land and marine systems, though international commercial volumes were negatively impacted by Covid-19. Operating margins for the fourth quarter fell 170 basis points to 14.2%, while yearly operating margins declined 50 basis points to 14.5% due to lower margins as a result of the Covid-19 impact on Maritime/Land Systems & Sensors.
Space Systems was higher by 31% to $2.6 billion. Space benefited from higher volumes on restricted programs and NASA programs. Launch & Strategic Missiles benefited from the ramp-up for the Ground Based Strategic Deterrent program, which is the ground-based leg of the U.S.'s nuclear triad. The operating margin fell 120 basis points to 10.1% for the quarter and decreased 50 basis points to 10.2% for the year.
For 2020, all segments posted growth and all Defense Systems had at least high single-digit growth rates. Space Systems was the best performer for the year, with revenue growing 18% year over year.
Northrop Grumman received a considerable number of awards during 2020. Net awards totaled almost $10 billion for the quarter while full-year awards reached nearly $53 billion.
A sampling of awards received in 2020 include:
- $17.4 billion for restricted programs, which include $9 billion for Space Systems, $6 billion for Aeronautics Systems and $2.2 billion for Mission Systems.
- $13.3 billion for the Ground Based Strategic Deterrent program.
- $1.9 billion for the Next Gen OPIR missile warning system.
- $1.7 billion for the F-35 program.
- $0.9 billion for the Triton, the company's high-altitude long endurance unmanned ariel vehicle.
- $0.8 billion for Global Hawk.
As you can see, awards received for the year were spread out amongst nearly all segments of the company. Given the size and breadth of new work, all of Northrop Grumman's segments are well positioned for continued growth beyond just 2020.
The company sports a massive backlog of $81 billion, which is 25% higher than the backlog at the end of 2019. This is also just below Northrop Grumman's record backlog of $81.3 billion that the company possessed at the end of the third quarter. The book-to-bill ratio was a solid 1.4 for 2020, showing that the company is increasing its backlog at a faster rate that it can work off. The backlog as is would take Northrop Grumman more than two years based on last year's revenue totals.
Northrop Grumman also remains an incredibly shareholder-friendly company. The company authorized an additional $3 billion in share repurchases, which when added to the prior authorization amounts to $5.8 billion of total share repurchases or nearly 12% of Northrop Grumman's current market capitalization. For the period of 2011 through 2020, the company reduced its share count by an average of 4.3% per year.
The company also raised its dividend by around 10% for the June 17, 2021 distribution, giving the company 17 consecutive years of dividend growth. Shares yield just 1.9%, but the dividend has increased with a compound annual growth rate of more than 11% over the last decade.
It ended the year with its balance sheet in a solid position. Total assets numbered $44.5 billion, with current assets of $15.3 billion and cash and equivalents of $4.9 billion. This compares to $33.9 billion of total liabilities and $9.6 billion of current liabilities. Total debt stood at $15.6 billion (down from $17.4 billion at the end of the third quarter), but no debt is due within the next year.
Adjusted free cash flow grew 18% to nearly $3.7 billion for the year, which was more than enough to cover the distribution of $953 million of dividends and $490 million worth of share repurchases during the year.
Northrop Grumman provided guidance for 2021 as well. Revenue for the current year is projected to be in the range of $35.1 billion to $35.5 billion, a 4.1% decline from the prior year at the midpoint. Adjusted earnings per share is expected in a range of $23.15 to $23.65, a 1.1% decrease at the midpoint from 2020.
The declines for revenue and adjusted earnings per share are due to the Northrop Grumman's decision to sell its federal IT and mission support services business to an affiliate of Veritas Capital for $3.4 billion in cash. Northrop Grumman has stated that the proceeds of this acquisition will be used to repurchase shares. Excluding revenue earned from this business from last year's results, revenue is expected to be 2.3% higher for 2021.
Valuation
The last time I looked at Northrop Grumman, I found that the stock offered tremendous value. The company's most recent earnings report only reinforces this belief.
Shares of Northrop Grumman trade for around $301 at the moment, down slightly from my last review of the company. Using the midpoint for expected adjusted earnings per share for 2021, the company has a forward price-earnings ratio of 12.9. Shares have an average price-earnings ratio of 13.9 over the last decade, meaning the stock trades at a solid discount to its historical valuation.
GuruFocus finds that Northrop Grumman is well below its GF Value.
Northrop Grumman has a GF Value of $382.30. Using the current stock price, shares have a price-to-GF Value of 0.79. This earns the company a rating of modestly undervalued from GuruFocus. Shareholders would see a 27% return from the current share price if the stock were to trade with its GF Value.
Final thoughts
Northrop Grumman has been a favorite name of mine in the aerospace and defense sector as its business model has been strong, its shareholder returns excellent and the valuation very attractive. The fourth-quarter and full-year results only reaffirm my bullishness on the company and stock. Investors looking for entry into the aerospace and defense sector could be well rewarded purchasing Northrop Grumman as the stock continues to trade below its own historical valuation as well as its intrinsic value. I continue to rate shares as a buy.
Disclosure: The author has no position in any stocks mentioned in this article.
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