Northrop Grumman (NOC)

Security and aerospace company Northrop Grumman (NYSE:NOC) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 6.6% year on year to $9.47 billion. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $42.25 billion at the midpoint. Its GAAP profit of $3.32 per share was 46.7% below 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Northrop Grumman’s sales grew at a sluggish 3.3% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector and is a poor baseline 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 4.3% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

This quarter, Northrop Grumman missed Wall Street’s estimates and reported a rather uninspiring 6.6% year-on-year revenue decline, generating $9.47 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 6% over the next 12 months. While this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.

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 10.4%.

Looking at the trend in its profitability, Northrop Grumman’s operating margin decreased by 6.4 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 profit margin of 6.1%, down 4.5 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

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 13.8% compounded annual growth rate over the last five years, higher than its 3.3% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

We can take a deeper look into Northrop Grumman’s earnings quality to better understand the drivers of its performance. A five-year view shows that Northrop Grumman has repurchased its stock, shrinking its share count by 14%. 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 more recent period because it can provide insight into an emerging theme or development for the business.

For Northrop Grumman, its two-year annual EPS declines of 9.4% mark a reversal from its (seemingly) healthy five-year trend. We hope Northrop Grumman can return to earnings growth in the future.

In Q1, Northrop Grumman reported EPS at $3.32, down from $6.32 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Northrop Grumman’s full-year EPS of $25.35 to grow 12.8%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 5.6%, subpar for an industrials business.

Taking a step back, we can see that Northrop Grumman’s margin dropped by 6 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 a big investment cycle.

Northrop Grumman burned through $1.82 billion of cash in Q1, equivalent to a negative 19.2% margin. The company’s cash burn increased from $976 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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 13.9%, 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 significantly 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 $1.69 billion of cash and $16.02 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 $5.3 billion of EBITDA over the last 12 months, we view Northrop Grumman’s 2.7× net-debt-to-EBITDA ratio as safe. We also see its $319 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.

We struggled to find many positives in these results. Its revenue missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 8.6% to $485 immediately following the results.

Updated: July 10, 2025 at 11:59 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Northrop Grumman.

Northrop Grumman doesn’t pass our quality test. To kick things off, its revenue growth was weak over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, 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 18x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $547.97 on the company (compared to the current share price of $514).