Northrop Grumman (NYSE:NOC) stock is riding high on robust industry trends that promise strong upside potential. As a key player in aerospace and defense, known for iconic creations such as the B-2 Spirit Stealth Bomber and F-35 Lightning, Northrop Grumman is thriving in the current landscape of escalating global conflicts. Its impressive Q3 earnings report and record-breaking backlog suggest continued favorable conditions, reinforcing my bullish outlook on the stock.
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Why is Northrop Grumman Benefiting from the Geopolitical Environment?
Northrop Grumman stands as a significant beneficiary of the current multipolar geopolitical terrain, as the prevalence of wars and conflicts is set to drive growing defense budgets. The company plays a pivotal role in providing mission-critical components such as communication systems, radar systems, unmanned systems, and other weapons systems integral to the U.S. military’s and its allies’ arsenals.
With demand for all such systems skyrocketing recently, Northrop Grumman is set to keep winning highly profitable contracts, thus sustaining a robust backlog, moving forward.
A noteworthy example of Northrop Grumman’s impact is its involvement in supplying weaponry, such as rocket motors utilized in guided multiple-launch rocket systems (GMLRS), to Ukraine through NATO allies. Further, Israel’s Defense Forces (IDF) heavily rely on the company’s advanced F-35 and other missile systems.
Therefore, whether Ukraine is drawing on NATO’s resources or the IDF is leveraging proprietary systems and ammunition in the ongoing conflict against Hamas, demand for Northrop’s systems is now on the rise. This inherently translates into a growing stream of upcoming supply orders as Northrop’s clients need to restore their supplies and continue investing in new technologies consistently as they strive to improve their capabilities.
As we navigate the current geopolitical terrain, the potential for further instability looms large, with multiple fronts facing looming threats. The possibility of a conflict between China and Taiwan adds to the complexity. Consequently, the rationale behind Northrop Grumman’s investment proposition has lately become increasingly compelling. The company’s most recent results certainly allude to that.
Excellent Performance, Driven by Record Order Backlog
As previously noted, the dynamic geopolitical landscape has become a favorable factor for Northrop Grumman, creating positive momentum within the industry. This, in turn, has led to a significant expansion of the company’s order backlog. In its most recent Q3 results, Northrop Grumman successfully leveraged its expanding backlog to achieve excellent financial results.
Simultaneously, as the influx of new orders outpaced the rate of deliveries, Northrop’s backlog reached unprecedented record highs at the end of the quarter. Thus, the company raised its Fiscal 2023 guidance, reflecting a heightened sense of optimism from the management team.
Strong Momentum Drives Growing Revenues
Notably, in Q3, Northrop continued to build on the momentum from the first half of the year. Achieving an impressive overall sales growth of 9% to reach $9.8 billion, the company’s success was underpinned by substantial improvements across all four segments. Noteworthy is the fact that this quarter marked the second consecutive period of sustained growth in every segment—a testament to Northrop’s adept and positive responsiveness to the prevailing industry tailwinds
At the segment level, Aeronautics experienced robust sales growth of 9%, primarily fueled by an increased volume of manned aircraft programs. The Defense Systems segment also witnessed a modest 6% jump in revenues, propelled by sustained excellence in missile defense and armaments portfolios, notably featuring IBCS, GMLRS, and HAKM.
In Mission Systems, the Network Information Solutions business spearheaded rapid growth in restricted sales, elevating the segment’s top line by an impressive 7%. Lastly, the Space segment achieved yet another milestone with a remarkable double-digit sales growth, showcasing sustained momentum across various programs.
Profits, Guidance, Backlog
Despite the challenging economic landscape marked by inflationary pressures on most industrial companies, Northrop Grumman has demonstrated resilience with robust sales, maintaining solid margins and achieving a noteworthy 5% increase in its earnings per share (EPS) to $6.18.
Adding to the positive outlook, buoyed by a surge in optimism, the company’s management has revised its guidance upwards, anticipating Fiscal 2023 sales to reach approximately $39.0 billion—up from the earlier range of $38.4 billion to $38.8 billion—with an adjusted EPS projection ranging between $22.45 and $22.85.
Most importantly, the spotlight falls on Northrop’s remarkable backlog, a key indicator pointing to promising future results. Closing the quarter with a backlog of $83.9 billion, reflecting a 7% increase from the previous year, the company enjoys exceptional cash-flow visibility. Considering its annual revenues nearing $39.0 billion, this substantial backlog positions Northrop Grumman for continued stellar top-line growth and potentially EPS growth over the medium term with minimal uncertainty.
Is NOC Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Northrop Grumman Stock has a Moderate Buy consensus rating based on seven Buys, four Holds, and one Sell assigned in the past three months. At $500.17, the average Northrop Grumman stock price target suggests 6.1% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell NOC stock, the most accurate analyst covering the stock (on a one-year timeframe) is Kristine Liwag from Morgan Stanley, with an average return of 16.1% per rating and an 80% success rate.
The Takeaway
Northrop Grumman’s strategic position in the aerospace and defense industry, coupled with the increasing demand for its mission-critical components, has formed a compelling investment case. The current geopolitical landscape, marked by rising conflicts and defense budgets, plays to Northrop’s strengths, evident in its record-breaking backlog. Hence, as its recently raised guidance suggests, NOC appears well-positioned for continued success, sustaining my bullish view of the stock.
