January 26, 2021

Northrop Grumman Offers Tremendous Value

 

The stock has struggled over the last year, but looks to be very undervalued

 


While the S&P 500 has railed almost 16% over the last year, the aerospace and defense sector has struggled. One of the worst performers in the group is Northrop Grumman Corp. (NYSE:NOC), which is down by more than 20% over the last 12 months.

 

There is a lot to like about Northrop Grumman, including higher defense spending, a record backlog for the company and nearly two decades of dividend growth. These are some of the reasons I have been so bullish on the stock. While the recent stock performance has been very weak, shares now trade at a price that offers the potential for tremendous gains.

 

Company background and historical performance

 

Northrop Grumman is one of the largest aerospace and defense contractors in the country. The company is comprised of four reportable business segments, including Aeronautics Systems, which provides manned and unmanned aircraft and UAVs, Mission Systems, which produces radars, sensors and surveillance and targeting systems, Defense Systems, which provides sustainment and modernization services and tactical weapons, and Space Systems, which manufactures missile defense and space systems.

 

Northrop Grumman has a market capitalization of almost $50 billion and generated revenue of nearly $34 billion in 2019. The company had a record backlog of $81.3 billion at the end of the most recent quarter.

 

As you can see from the 30-year chart above, Northrop Grumman generally had steady revenue growth until early in the last decade. This is a largely a result of the company spinning off of its ship building business, Huntington Ingalls Industries Inc. (NYSE:HII), in 2011. As such, revenue is down slightly from 2010 through 2019. Revenue has grown at a rate of 7.5% over the last half-decade.

 

 

Despite this loss of revenue from its shipbuilding business, the decline in profits wasn't that steep. In fact, the company's net profits grew with a compound annual growth rate of 7.5% over the last decade. Removing the ship building business helped for an improvement in profit margin, which grew from 5% in 2010 to 10.7% in 2019.

 

As a result, Northrop Grumman ranks higher than many of its peers in terms of profitability.

 

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