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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