Record Backlog And Sentinel Test Will Boost Future Success

Key Takeaways

• Strong backlog and international contracts promise future revenue growth, with improving award timelines projected to enable sustained sales ramp-up.
  
• Investments in AI and engineering bolster competitive edge, enhancing innovation and enabling higher-margin projects and increased future revenues.
  
• Rising costs, contract delays, and a volatile defense budget environment threaten Northrop Grumman's profitability and revenue growth.

Catalysts

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

• Northrop Grumman has achieved another record backlog of $92.8 billion, with strong international bookings indicating future revenue potential. As award delays improve throughout 2025, the company expects a sales ramp and continued growth. This directly impacts future revenue growth.
  
• The completion of key program milestones, like the successful Stage 1 solid rocket motor static fire test for the Sentinel program, enables Northrop Grumman to progress toward production and deployment of strategic deterrents, thereby enhancing the growth potential of future revenues and operational margins.
  
• Expansion into international markets with programs like the $500 million contract for IBCS and nearly $300 million in awards from the U.S. Navy for Triton aircraft suggest further revenue increases and margin improvements through scale and newer, higher-margin projects.
  
• The ongoing U.S. defense budget environment, with expected increases in defense spending and flexibility in spending accounts, provides an expanded budgetary framework that could result in increased contract awards and government spending on Northrop Grumman products, benefiting future revenues and earnings.
  
• Strategic investments in AI and model-based systems engineering capabilities ensure Northrop Grumman's competitive edge in innovation, potentially driving higher future revenues through differentiated, higher-margin offerings in software and system integration services.

Northrop Grumman Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northrop Grumman's revenue will grow by 5.2% annually over the next 3 years.
• Analysts are assuming Northrop Grumman's profit margins will remain the same at 9.2% over the next 3 years.
• Analysts expect earnings to reach $4.3 billion (and earnings per share of $31.89) by about April 2028, up from $3.7 billion today. 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 20.5x on those 2028 earnings, up from 18.0x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 30.0x.
• Analysts expect the number of shares outstanding to decline by 2.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Northrop Grumman Future Earnings Per Share Growth

Risks

• The B-21 program has incurred a substantial pre-tax loss of $477 million due to higher manufacturing costs, influenced by a process change and increased projected material costs. This could negatively impact net margins and earnings.
  
• Northrop Grumman faces delays in awards, which led to a lower-than-expected sales ramp in the first quarter, with potential impacts on revenue.
  
• The U.S. defense budget environment remains dynamic and uncertain, which could affect future government spending and revenue forecasts.
  
• Inflationary pressures and macroeconomic factors have led to increased costs across several programs, posing risks to operating margins and overall profitability.
  
• The company experienced a 7% decline in first-quarter sales compared to the prior year, driven by contracting delays and material receipts timing, influencing current revenue growth.

Valuation

• The analysts have a consensus price target of $560.219 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 $625.0, and the most bearish reporting a price target of just $463.83.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $47.1 billion, earnings will come to $4.3 billion, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $464.08, the analyst price target of $560.22 is 17.2% 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.