Northrop Earnings: Accelerated Aeronautics and Space Sales Growth Boosts Valuation to $440 From $434

Northrop Grumman NOC reported third-quarter results mostly consistent with our 2023 forecast. Even so, management revised its 2023 revenue expectations upward in aeronautics and space, while slightly lowering them for operating margin in the mission systems business.

We increased our fair value estimate to $440 from $434. The increase is partly because of the time value of money, but also because we brought forward our forecast revenue growth beyond 2023 in the aeronautics and space divisions. The fair value raise is somewhat tempered by lower near-term margins than we expect the company will eventually achieve.

The uptick in 2023 revenue growth came primarily from increased deliveries for manned aircraft in aeronautics, such as the B-21 bomber, F-18 and F-35 fuselages, and surveillance aircraft.

Two programs account for the bulk of future revenue growth in Northrop’s $13 billion space systems business. The first is the ground-based strategic deterrent, also known as Sentinel or long-range ballistic nuclear missiles fired from land. The second is the next-generation interceptor, a missile defense system to counteract long-range ballistic missiles. Both programs represent tens of billions of dollars of work and are relatively early in their decades-long life span, which will stretch into the 2030s. For a defense contractor, these programs have also contributed to unusually rapid midteens growth rates in Northrop’s space segment over the last few years. As these programs progress from development and testing to initial production and eventual full-scale deployment, Northrop’s space segment revenue growth will decelerate, but likely at a higher margin than the company is booking today. We forecast that space segment operating margins will reach 10% on revenue of $16.8 billion by 2026, up from our previous forecast of $16.4 billion. This may prove to be a conservative estimate.