Advanced Manufacturing And New Defense Contracts Will Strengthen Future Prospects

Key Takeaways

• Record backlog and significant contracts indicate strong foundational revenue growth potential.
  
• Strategic divestitures and advanced manufacturing aim to enhance efficiency, margins, and earnings growth.
  
• Reliance on defense budgets, program execution, and international market stability could impact revenue, while advanced manufacturing investments aim to improve efficiencies despite potential challenges.

Catalysts

Operates as an aerospace and defense technology company in the United States, the Asia/Pacific, Europe, and internationally.

• The record backlog of approximately $91.5 billion, driven by significant new competitive wins and follow-on awards such as the TACAMO program and the B-21 contract, suggests strong foundational revenue growth potential.
  
• The international business is expected to accelerate and grow faster than U.S. sales in 2025, driven by strong demand such as a $900 million booking for Poland's IBCS system, impacting overall revenue growth.
  
• Implementation of advanced manufacturing techniques, automation, and digital factories, enabling scalable production and efficiency, is likely to enhance net margins and reduce costs.
  
• The planned divestiture of the training services business, streamlining operations to focus on strategic priorities, should allow for improved net margins and concentrated earnings growth.
  
• The shift towards favorable business mix, including ramping production programs and increased international sales, is anticipated to drive segment margin expansion, positively impacting future earnings.

Northrop Grumman Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northrop Grumman's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.2% today to 9.1% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being $4.2 billion (with an earnings per share of $31.0). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, up from 16.9x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 31.8x.
• Analysts expect the number of shares outstanding to decline by 2.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

Northrop Grumman Future Earnings Per Share Growth

Risks

• Changes in U.S. defense budget appropriation or shifts in bipartisan support could impact future revenues, particularly since projections are reliant on completion of FY '25 appropriations and strong defense budgets.
  
• Potential restructuring and execution challenges in key programs like Sentinel may lead to timeline shifts, which could impact the expected growth in revenue if not managed effectively.
  
• Exposure to certain international markets is expected to grow, though geopolitical risks or changes in international defense spending priorities could impact revenue from these regions.
  
• Though investments in advanced manufacturing techniques are expected to drive efficiencies, any setbacks or complications in implementing digital factories and other cost savings techniques could impact net margins.
  
• Revenue growth is partially reliant on multi-year awards and ongoing contracts, which are subject to government acquisition schedules and may be delayed or modified, impacting future financial performance.

Valuation

• The analysts have a consensus price target of $547.977 for Northrop Grumman based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $600.0, and the most bearish reporting a price target of just $424.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $46.3 billion, earnings will come to $4.2 billion, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $486.52, the analyst price target of $547.98 is 11.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.