Expanding International Sales And Innovation In Defense Propel Future Profitability And Growth

Key Takeaways

• Strong backlog and cost efficiencies are expected to drive revenue growth and improve operating margins.
  
• International sales growth and increased defense funding support revenue and profitability enhancements.
  
• Supply chain issues and program restructuring may delay deliveries and affect Northrop Grumman's revenue and margins amidst defense budget uncertainties.

Catalysts

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

• Northrop Grumman's strong backlog of $85 billion, which is more than twice its annual revenue, supports future revenue growth and indicates strong demand for its products.
  
• Continued implementation of cost efficiencies and advanced production capabilities are expected to improve operating margins and drive future earnings growth.
  
• Growth in international sales, particularly in Europe, is expected to exceed the rest of the business, providing margin expansion opportunities and boosting future revenue.
  
• Increased bipartisan support for national security priorities and proposed additional funding for defense budgets are likely to enhance future revenue and profitability.
  
• Northrop Grumman plans to rapidly expand free cash flow over the next several years, supporting earnings growth and enabling substantial shareholder returns.

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 increase from 5.8% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $4.4 billion (and earnings per share of $31.59) by about November 2027, up from $2.4 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 21.5x on those 2027 earnings, down from 30.1x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.3x.
• Analysts expect the number of shares outstanding to decline by 1.84% 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

• Supply chain challenges, particularly with capacity and productivity in microelectronics and other areas, could hinder Northrop Grumman's ability to deliver on time, affecting revenue and margins.
  
• Restructuring and scheduling changes in significant programs like Sentinel may lead to delays and uncertainties, potentially impacting future revenue growth.
  
• The winding down of major programs in the Space segment, such as NGI, could lead to a revenue decline in that area, affecting overall company growth.
  
• Dependence on the defense budget and political factors, such as U.S. and international legislative processes, introduces uncertainty that may affect revenue and earnings.
  
• Significant investment in capital expenditures and facilities to increase capacity, while important for growth, could impact net margins if demand conditions change.

Valuation

• The analysts have a consensus price target of $566.91 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 $643.0, and the most bearish reporting a price target of just $448.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $46.2 billion, earnings will come to $4.4 billion, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 6.4%.
• Given the current share price of $491.02, the analyst's price target of $566.91 is 13.4% 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.