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Over the last six months, Northrop Grumman shares have sunk to $489.24, producing a disappointing 8.2% loss - worse than the S&P 500’s 1.4% drop. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Northrop Grumman, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than NOC and a stock we'd rather own.
Why Do We Think Northrop Grumman Will Underperform?
Responsible for the development of the first stealth bomber, Northrop Grumman (NYSE:NOC) specializes in providing aerospace, defense, and security solutions for various industry applications.
1. Slow Organic Growth Suggests Waning Demand In Core Business
In addition to reported revenue, organic revenue is a useful data point for analyzing Defense Contractors companies. This metric gives visibility into Northrop Grumman’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Northrop Grumman’s organic revenue averaged 6% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Northrop Grumman’s unimpressive 4.2% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Northrop Grumman’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of Northrop Grumman, we’re out. After the recent drawdown, the stock trades at 17.4× forward price-to-earnings (or $489.24 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.