Ukrainian Counter-Offensive to Support Northrop Grumman’s (NYSE:NOC) Bull Case

Northrop Grumman (NYSE:NOC) stock has lagged in recent months, with investors apparently ignoring the ongoing benefits the company enjoys as a result of the constant, unfortunate war in Ukraine. In fact, the ongoing conflict has been escalating, as on June 4th, the much-awaited Ukrainian counter-offensive began, with front-line troops already recording notable gains on the ground.

The unwavering commitment of Western nations to support Ukraine “for as long as it takes” has remained resolute. Kyiv’s consistent requests for additional military arsenal and equipment have been met with cautious yet responsive actions from Western allies. Efforts are underway to supply the Ukrainian military with the most advanced weapons systems available, albeit with a prudent approach.

This dynamic has placed military-industrial powerhouses like Northrop Grumman in an exceptionally advantageous position. The ongoing transfer of armaments from NATO countries to Ukraine has translated into a robust order flow and an expanding delivery backlog. I believe that the market underappreciates this potential, and for this reason, I am bullish on shares of Northrop Grumman.

Northrop Arsenal on the Battlefield to Boost Financials

The Western allies’ provision of military arsenal and equipment in Ukraine includes many of Northrop’s products. In turn, it’s reasonable to expect a boost in the company’s financials and overall order backlog. For instance, back in February, Northrop Grumman (along with Global Military Products) won $522.3 million worth of order contracts to make 155mm artillery munitions that have already been deployed in Ukraine’s ongoing counter-offensive.

In the meantime, future assistance packages shipped by the U.S. government will include Northrop Grumman’s Mobile, Acquisition, Cueing and Effector System (M-ACE) and its gun truck. Interestingly, this system has never been operated outside of testing and actually utilizes machine learning and artificial intelligence (AI). Regardless, these are just some examples of Northrop’s massive role in NATO’s ongoing military assistance.

We can already see the effects of this involvement in the company’s financial performance and order flow. In Northrop’s most recent Q1 results, total revenues rose by 6% to $9.3 billion.

Particularly, revenues from Defense Systems exhibited a commendable growth of 7% compared to the previous year, reaching an impressive $1.38 billion. This remarkable achievement can be attributed to increased sales volumes in both Battle Management & Missile Systems.

Notably, the Integrated Air and Missile Defense Battle Command System (IBCS) program played a pivotal role in bolstering sales figures. Additionally, the 120mm Tank Training ammunition program experienced a substantial ramp-up, further contributing to the surge in revenues.

Furthermore, the Space Systems division experienced remarkable progress, with revenues soaring by an impressive 17% to reach $3.4 billion. This substantial growth within the segment can be attributed to enhanced sales in Launch & Strategic Missiles. The development programs, including the Ground Based Strategic Deterrent (GBSD) program, witnessed a staggering $161 million increase, thereby significantly bolstering the sales figures.

It’s also worth mentioning that the Next Generation Interceptor (NGI) and Ground-based Midcourse Defense Weapon Systems (GWS) programs also recorded higher volumes, making noteworthy contributions to the overall revenue growth. These programs are likely to keep seeing increased traction as Ukraine battles for air defense and missile interception capabilities.

Robust Backlog & Profitability

With all these deliveries being made to Ukraine, NATO countries will need to replenish their equipment and stock, which should result in a robust order backlog for the company for quite some time in the future.

In Q1 alone, the company booked $8.0 billion in net awards, boosting its total backlog to $77.5 billion. This represents about 2.1 years’ worth of future sales for the company at its current revenue run rate. Therefore, Northrop’s short to medium-term results should remain very strong, especially with new orders keep coming in.

Northrop’s strong backlog and accelerated pace of deliveries should allow the company to realize robust margins and post another highly-profitable year. Specifically, management projects adjusted earnings per share to be between $22.25 and $22.85.

Note that the midpoint of this range implies a decline from last year’s result of $25.54. This is mostly due to inflationary pressures the company has faced recently. Still, such shocks are normal in capital-intensive industries such as aerospace and defense and should average out over time.

Is NOC Stock a Buy, According to Analysts?

Turning to Wall Street, Northrop Grumman Stock has a Moderate Buy consensus rating based on five Buys, five Holds, and one Sell assigned in the past three months. At $517.18, the average Northrop Grumman stock price projection suggests 15.4% 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 Charles Minervino from Susquehanna, with an average return of 19.96% per rating and a 78% success rate.

The Takeaway

The Western allies’ provision of military arsenal and equipment to Ukraine has translated into a robust order flow and an expanding delivery for Northrop Grumman. The company’s strong financial performance, increased revenues, and exceptional cash-flow visibility indicate a profitable future.

While some minor short-term challenges have taken place, primarily due to inflation, the company’s long-term prospects remain promising. The mission-critical and highly-essential replenishment of NATO equipment will likely result in robust demand for Northrop’s system for years to come, which still fuels the bull case for the stock.

Disclosure