Northrop Grumman Corp NOC

Northrop Earnings: Raising Our Fair Value Estimate 16% on Long-Term Conviction in the Franchise

Northrop Grumman reported first-quarter 2024 results very close to our expectations, and management tweaked this year's sales and profit guidance slightly upward. Operating margin improvement in the first quarter was driven by productivity gains materializing earlier in the year than the company had anticipated but don't meaningfully impact the full-year outcome. We added to our 2024 estimates for aviation and shaved a few basis points of revenue growth from space, per management's expectations, which added $2 to our fair value estimate and time value of money added $6 more. All told, we have raised our fair value estimate an additional 14% to $555 per share from $480 based on our conviction in this wide-moat firm's discipline and ability to reinvest for success year over year. To reflect this, we raised our estimate of the company's midcycle earnings growth to 6.5% from 4.5% and upped the quotient of those earnings we think the company can successfully compound internally to a midcycle average of 25% from a less-than-average 10%, giving it a few more years of historically consistent returns on capital before our model assumes competition will eventually erode economic profits 20 years hence.