US And Allied Defense Budgets Will Unlock New Opportunities

Key Takeaways

• Elevated defense spending, robust international demand, and leadership in next-generation platforms are strengthening revenue growth and enhancing operating margins.
  
• Expansion in high-growth market segments and supportive government actions are improving program execution, cash flow, and long-term earnings stability.
  
• Heavy dependence on major defense contracts, shifting global priorities, and execution risks threaten sustained growth, margin stability, and future international positioning.

Catalysts

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

• Accelerating U.S. and allied defense spending, supported by substantial increases in procurement and RDT&E budgets (e.g., 22% increase in U.S. spending for FY26) and significant new funding for key Northrop Grumman programs (B-21, Sentinel, and E-2D), is expected to drive sustained revenue growth and provide multi-year order visibility.
  
• Global proliferation of advanced military threats and the strategic importance of missile defense and space-based systems are leading to robust international demand, with 18% year-over-year international sales growth and strong awards in markets such as Europe and the Middle East, which should further support both revenue expansion and higher-margin contracts.
  
• Northrop Grumman's leadership on next-generation platforms, including the B-21 Raider and Sentinel programs, is benefiting from both improved program execution and favorable customer incentives, positioning these programs to contribute meaningfully to operating margins and earnings over the coming years as production ramps occur.
  
• The ramp-up of advanced autonomous and integrated systems such as Beacon and IBCS, combined with ongoing investments in solid rocket motor capacity (targeting a near-doubling by 2029), positions the company to capitalize on high-growth, higher-margin market segments, thereby enhancing future operating margins and underlying cash flow.
  
• Supportive government actions to remove regulatory and contractual barriers are leading to faster program execution and improved incentives, which, coupled with targeted capital investments and a strong backlog, are expected to improve earnings stability, free cash flow, and long-term profitability.

Northrop Grumman Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northrop Grumman's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.7% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $4.4 billion (and earnings per share of $32.65) by about September 2028, up from $3.9 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 23.2x on those 2028 earnings, up from 20.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.4x.
• Analysts expect the number of shares outstanding to decline by 1.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Northrop Grumman Future Earnings Per Share Growth

Risks

• While current demand and backlog are strong, long-term reliance on sizable U.S. government contracts (particularly B-21 and Sentinel) exposes Northrop Grumman to significant programmatic and budgetary risks including potential delays, cancellations, or changes in political priorities that could reduce revenue visibility and create volatility in top-line growth.
  
• Growing partnerships with international allies are driving up overseas sales, but the trend toward European and other allied nations developing indigenous defense capabilities could erode Northrop Grumman's long-term international market share, eventually impacting revenue and limiting margin upside.
  
• The company's strategy increasingly relies on large, high-cost hardware systems, even as global defense budgets may gradually shift toward software, cyber, and attritable/autonomous platforms; if Northrop is outpaced by more agile competitors in these emerging domains, it could face slower growth and potential margin compression.
  
• Heavy ongoing capital investments in facilities, production capacity, and innovation expose the company to execution risks and create the potential for cost overruns, which-given fixed-price contract structures-could squeeze net margins and earnings if not perfectly managed or if awards/contracts do not materialize as expected.
  
• Persistent regulatory and political attention on defense spending, combined with changing tax treatment (e.g., R&D credits), ESG pressures, and the risk of future arms control or budget constraints, could dampen institutional investor interest, reduce valuation multiples, and put long-term pressure on earnings and cash flow.

Valuation

• The analysts have a consensus price target of $603.316 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 $690.0, and the most bearish reporting a price target of just $510.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $47.5 billion, earnings will come to $4.4 billion, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of $571.63, the analyst price target of $603.32 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.