Northrop Earnings: A Good Start to 2023 With Steady Prospects; Raising Fair Value to $428

Northrop NOC reported first-quarter results basically in line with our 2023 forecast, and management reaffirmed its 2023 expectations. Discussion of the quarter focused on Northrop’s exposure to big-budget defense programs, its space business, and overall growth potential. We have raised our fair value estimate to $428 from $423, mostly to account for a shrinking share count, as the firm continues to plow money back to shareholders. Our forecast is otherwise unchanged.

Northrop highlighted long term programs such as its B-21 bomber and next generation ballistic missile as budgeted to double their government funding from 2023 to 2028 (a 13.4% annualized rate). While we agree Northrop will benefit from increased revenue in those early-stage programs, their contribution to growth will be offset by the eventual retirement of more mature programs, which tempers the overall growth forecast.

The space segment, where Northrop has a very strong market position (on pace to grow 18% annually for the five years through 2023) seems an exception, though management cautioned on the call not to expect such heady growth in future. We don’t see a problem, and reaffirm our view that investors looking for double-digit revenue growth in the defense sector will likely be disappointed most of the time. That said, Northrop has increased its dividends per share (by paying them and by buying back shares) by 12% annually for the 10 years through 2022, a double-digit figure we do believe this wide-moat company can very well maintain.