NOC with Nobias Technology: Case Study on Northrop Grumman
Throughout 2022, defense contractors have been one of the few rays of sunshine for investors in the stock market. For months, positive sentiment has surrounded the defense stocks with talk of the U.S. and its NATO allies increasing the size of their defense budgets to combat the Russian threat. Many of the large U.S. defense players have posted strong positive total returns on a year-to-date basis, overcoming the inflationary headwinds, in large part, due to bullish momentum created by the war in Ukraine. However, in recent days, that tide has turned a bit, with large cap defense stocks posting negative returns over the last month.
During the last 30 days, shares of Lockheed Martin (LMT) are down 3.90%, shares of General Dynamics (GD) are down 5.28%, shares of Raytheon Technologies (RTX) are down 2.88%, shares of L3Harris Technologies (LHX) are down 1.23%, and shares of Northrop Grumman (NOC) are up 0.85%. Now, all of these results are still relatively higher than the -7.43% returns that the S&P 500 index has posted during the last month. Furthermore, on a year-to-date basis, each of these stocks has also posted total returns that represent relative outperformance when compared to the S&P 500.
LMT’s year-to-date gains are 20.19%, GD’s year-to-date gains are 5.83%, RTX’s year-to-date gains are 7.99%, LHX’s year-to-date gains are 13.25%, and NOC’s year-to-gate gains are 24.99%. For comparison’s sake, the S&P 500 is down 19.84% on a year-to-date basis. But, even with all of this bullishness in mind, earlier this week we saw a day where most of these names were down in the 4-6% range, with little to no significant news coming out of Ukraine. Since then, there has been a slight rebound, but that near-term weakness posed the question, are these outperformers starting to show cracks in their armor? And, with that in mind, we wanted to take a look at reports published by credible authors and analysts which have focused on Northrop Grumman (the best year-to-date performer of this space) to see whether or not this is a company that investors should still have on their watch lists.
NOC Jul 2022
After NOC’s most recent earnings report (which was posted in late April), Sejuti Banerjea, a Nobias 4-star rated author, covered the company’s operational results in an article published at zacks.com. Banerjea wrote, “Northrop Grumman’s March quarter was a bit of a mixed bag. While revenue missed estimates by less than a percent and grew from the year-ago quarter by a mere 3.6%, its earnings were a bit more encouraging, growing 8.6% to beat the Zacks Consensus Estimate by 2.5%.”
Looking at operating segment data, Banerjea said, “Aeronautics Systems revenue of $2.703 billion beat estimates by 1.3%; Defense Systems revenue of $1.283 billion missed by 10.9%; Mission Systems revenue of $2.497 billion missed by 3.7% and Space Systems revenue of $2.855 billion beat by 4.9%. Net intersegment eliminations of -$541 million missed by 5%.”
In conclusion, Banerjea wrote, “Northrop Grumman’s overall performance was more or less in line with what analysts expected with the aeronautics segment being the main outperformer, both in terms of revenue and profitability.”
Dhierin Bechai, a Nobias 4-star rated author, more recently touched upon NOC’s first quarter results in an article at Seeking Alpha titled, “Northrop Grumman: A Defense Winner With Growth And A Dividend”. In that piece, Bechai provided relatively bearish commentary on the Q1 results, touching upon the poor revenue growth as well as issues with margins (overall), stating, “While Aeronautics and Defense Systems revenues dropped, their margins improved, which led to stable operating income for Aeronautics Systems while the profit for Defense Systems declined by 12% on a 18% reduction in revenues. Mission systems margins remained more or less stable producing a 3% decline in profits. The strong surge in Space Systems revenues did not translate into higher profits as a 180 points reduction in margin more than offset the topline performance. Overall, income was 5% lower on 4% lower revenues.”
He continued, “As an investor, you would like to see top- and bottom-line growth but Northrop Grumman did not produce a year-over-year growth on either metric and when listening to the call and going through the call I found that the company provided extremely little color to what caused the declines.”
Ultimately, Bechai said that on page 75 of its recent 10-Q, NOC noted that “COVID-19, employee leave and supply chain challenges” were the primary contributors to the margin issues. But, as concerning as the Q1 report was, Bechai maintained a bullish stance on the company moving forward, writing, “While I would like to have seen Northrop Grumman provide more color on the margin and revenue pressures, I was pleased with the detail the Defense company provided for 2022 and the upcoming years.”
Looking at full-year 2022 guidance, Bechai wrote, “For 2022, Northrop Grumman maintained its guidance with $36.2 billion to $36.6 billion in sales and 11.7%-11.9% operating margin resulting in a $24.50-$25.10 adjusted earnings per share.”
Bechai said, “Overall, Northrop Grumman is guiding for 1.4% to 2.5% increase in revenues and $4.2 billion to $4.36 billion in profits. That provides a 3% uptick in profits unadjusted for inflation.” He continued, “I would say that the outlook for 2022 is not spectacular and neither is the 24% to 25% of full-year revenues that's expected in the second quarter. More useful is the color provided beyond 2022.”
Regarding longer-term growth prospects, he stated, “the company expects acceleration of revenue growth in the second half of the year as reflected in the guidance and that momentum to carry into 2023. In 2023, the aeronautics revenues will be more or less flat with growth returning in 2024 supported by the B-21 strategic bomber. In 2023-2024, Northrop Grumman sees the earliest opportunities for meaningful impact on contracts awards as international customers increase defense budgets while margins will tick up to 12%.”
Concluding his piece, Bechai said, “Northrop Grumman increased its dividend by 10% earlier this year and I believe that while its yields is not the most attractive, the combination of revenue growth, share repurchases and dividend hikes provide a solid investment opportunity in a market that is currently plagued by inflation but has seen demand for defense equipment rising.”
Jed Graham, a Nobias 4-star rated author, also recently highlighted his bullish outlook on NOC in an article published at investors.com. Graham highlighted a new $800 million round of military aid that the U.S. is providing Ukraine as a bullish catalyst for the stock. He continued, stating, “A potentially bigger deal for Northrop was the June 24 news it reached the next stage of the competition for a multibillion-dollar contract for missiles to intercept hypersonic weapons. That puts it head-to-head against Raytheon Technologies, while Lockheed Martin was eliminated.”
Graham also noted, “Northrop has been one of the big winners as the strategic implications of Russia's invasion boosts defense budgets, with Biden requesting $773 billion for fiscal 2023. That includes funds for initial production of Northrop's B-21 Raider stealth bomber and an increase in funds for developing an intercontinental ballistic missile known as the Ground Based Strategic Deterrent.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Regarding the large contracts the NOC has garnered in recent years, Graham stated, “The Air Force plans to spend $20 billion for B-21 production over five years. In 2020, Northrop received a $13.3-billion contract to develop the new ICBM.”
Like Bechai, Graham acknowledged poor fundamental growth in recent quarters from NOC; however, he said that several major projects underway have the potential “to fuel growth in 2023 and beyond.”
Overall, the vast majority of credible authors (those that have earned 4 and 5-star ratings by the Nobias algorithm) share this bullish sentiment. 90% of recent articles published on NOC by credible authors have expressed a “Bullish” sentiment.
However, the credible Wall Street analysts that the Nobias algorithm tracks are less bullish. Right now, the average price target being applied to NOC shares by credible analysts is $477.33. Right now, NOC trades for $481.87. Therefore, the average price target supplied by credible analysts implies downside of approximately 0.94%. With that in mind, it appears that NOC shares are hovering right around fair value at the moment and bullish investors are going to have to look out further into the future to find the catalysts that could push Northrop Grumman to new highs.
Disclosure: Of the stocks discussed in this article, Nicholas Ward is long NOC, LMT, RTX, and LHX. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.