Northrop Grumman (NOC)

Security and aerospace company Northrop Grumman (NYSE:NOC) missed Wall Street’s revenue expectations in Q3 CY2025 as sales rose 4.3% year on year to $10.42 billion. The company’s full-year revenue guidance of $41.8 billion at the midpoint came in 0.9% below analysts’ estimates. Its GAAP profit of $7.67 per share was 18.7% above analysts’ consensus estimates.

Company Overview

Responsible for the development of the first stealth bomber, Northrop Grumman (NYSE:NOC) specializes in providing aerospace, defense, and security solutions for various industry applications.

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Northrop Grumman’s peers and competitors include Boeing (NYSE:BA), Raytheon (NYSE:RTX), General Dynamics (NYSE:GD), and Lockheed Martin (NYSE:LMT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Northrop Grumman grew its sales at a sluggish 3% compounded annual growth rate. This fell short of our benchmarks and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Northrop Grumman’s annualized revenue growth of 2.9% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

Northrop Grumman also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Northrop Grumman’s backlog reached $91.45 billion in the latest quarter and averaged 7.6% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Northrop Grumman’s products and services but raises concerns about capacity constraints.

This quarter, Northrop Grumman’s revenue grew by 4.3% year on year to $10.42 billion, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 7.2% over the next 12 months. While this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.

Northrop Grumman has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.6%.

Looking at the trend in its profitability, Northrop Grumman’s operating margin decreased by 5.7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Northrop Grumman generated an operating margin profit margin of 11.9%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Northrop Grumman’s EPS grew at a remarkable 13.7% compounded annual growth rate over the last five years, higher than its 3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Northrop Grumman’s quality of earnings can give us a better understanding of its performance. A five-year view shows that Northrop Grumman has repurchased its stock, shrinking its share count by 14.2%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Northrop Grumman, its two-year annual EPS declines of 4.5% mark a reversal from its (seemingly) healthy five-year trend. We hope Northrop Grumman can return to earnings growth in the future.

In Q3, Northrop Grumman reported EPS of $7.67, up from $7.00 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Northrop Grumman’s full-year EPS of $27.81 to grow 1.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Northrop Grumman has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.9%, subpar for an industrials business.

Taking a step back, we can see that Northrop Grumman’s margin dropped by 2.1 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of an investment cycle.

Northrop Grumman’s free cash flow clocked in at $1.26 billion in Q3, equivalent to a 12.1% margin. This result was good as its margin was 4.7 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Northrop Grumman hasn’t been the highest-quality company lately because of its poor top-line performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 13.7%, higher than most industrials businesses.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Northrop Grumman’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Northrop Grumman reported $1.96 billion of cash and $16.96 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $5.41 billion of EBITDA over the last 12 months, we view Northrop Grumman’s 2.8× net-debt-to-EBITDA ratio as safe. We also see its $328 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Northrop Grumman beat analysts’ EPS expectations this quarter. On the other hand, its revenue missed and its EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 2.1% to $590 immediately following the results.

Updated: December 4, 2025 at 10:53 PM EST

When considering an investment in Northrop Grumman, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

We see the value of companies helping their customers, but in the case of Northrop Grumman, we’re out. To kick things off, its revenue growth was weak over the last five years. And while its solid ROIC suggests it has grown profitably in the past, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining operating margin shows the business has become less efficient.

Northrop Grumman’s P/E ratio based on the next 12 months is 20x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $663.21 on the company (compared to the current share price of $553.10).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.