Is Northrop Grumman’s Valuation Justified as Pentagon Nears Stealth Fighter Decision?

Trying to decide what to do with Northrop Grumman stock right now? You are not alone. With a share price sitting at $618.52 as of the last close and a year-to-date performance of 32.2%, it is hard not to notice how this defense giant has been quietly marching higher. In just the past month, Northrop shares climbed 6.5%, and over the last 5 years, they are up an impressive 112.3%. That is serious long-term momentum, and it has some investors wondering if we are still early in the story or arriving late to the party.

Recent headlines have only added fuel to this debate. The Pentagon is close to choosing a contractor for the Navy's next stealth fighter, and Northrop is right in the mix. In addition, government agencies are calling for increased missile and chip production, which plays directly into Northrop's strengths. All of this suggests that the market may be revisiting its assumptions about the company’s growth and risk profile, raising questions about whether shares are now more attractively priced or perhaps already pricey after the strong run.

From a valuation perspective, Northrop Grumman earns a value score of 3 out of 6 possible checks for being undervalued. That is a solid, middle-of-the-road indicator, suggesting there may be overlooked value but also that caution is warranted. Next, we will break down exactly how Northrop stacks up across different valuation approaches. At the end, we will share a perspective that goes beyond the typical metrics.

Why Northrop Grumman is lagging behind its peers

Approach 1: Northrop Grumman Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company’s true value by projecting future free cash flows and discounting them back to today’s dollars. This method is widely used because it focuses directly on the cash Northrop Grumman is expected to produce, adjusting for the time value of money.

Currently, Northrop Grumman generates Free Cash Flow (FCF) of about $1.29 billion. According to analyst estimates and further extrapolations, its annual FCF is projected to grow steadily over the next decade and may potentially reach $5.27 billion by 2035. These projections rely on both near-term analyst outlooks and longer-term growth assumptions.

Based on this model, the estimated intrinsic value of Northrop Grumman shares is $546.54. Compared to a recent share price of $618.52, this implies the stock is 13.2% above its fair value, suggesting it is currently overvalued according to DCF analysis.

Result: OVERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Northrop Grumman.

Our Discounted Cash Flow (DCF) analysis suggests Northrop Grumman may be overvalued by 13.2%. Find undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Northrop Grumman Price vs Earnings

For profitable companies like Northrop Grumman, the Price-to-Earnings (PE) ratio is a useful metric because it expresses how much investors are willing to pay for each dollar of the company’s current earnings. A higher PE ratio can indicate optimism about future growth, while a lower one may reflect concerns about risk, slowing growth, or other headwinds. What is considered “fair” depends on factors such as expected earnings growth, profitability, and business risk.

Right now, Northrop Grumman trades at a PE ratio of 22.4x. This is well below both its peer average of 37.0x and the Aerospace & Defense industry average of about 40x. On the surface, this suggests that investors are pricing Northrop shares more conservatively compared to similar companies, possibly because of differences in expected earnings growth or perceived risk.

However, Simply Wall St’s “Fair Ratio” model provides deeper insight by weighing Northrop’s specific growth outlook, profitability, scale, and industry context. The model calculates a fair PE ratio of 26.3x for Northrop Grumman. This is a more tailored benchmark than raw peer or industry comparisons. This fair ratio takes into account not just overall industry sentiment but also factors unique to Northrop, resulting in a more refined view of value.

Comparing Northrop's current PE of 22.4x to its fair ratio of 26.3x suggests the stock is undervalued based on earnings multiples and could offer value for investors looking for exposure to the sector.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Northrop Grumman Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. A Narrative is a story you create about a company’s future; it wraps your perspective on Northrop Grumman’s growth, risks, and opportunities into a set of financial assumptions, like projected earnings or profit margins. This then builds a fair value grounded in your view, not just consensus numbers.

Narratives link a company’s real-world story and context to forecasts and valuation tools, making it easier to decide if the stock is a buy, hold, or sell when you compare your own fair value to the current share price. This dynamic approach is accessible to everyone through the Community page on Simply Wall St, where millions of investors share and update their Narratives as news and company data changes. Your views can adapt instantly to new information.

For example, some Northrop Grumman investors believe global defense spending and demand for next-gen platforms will propel revenue and margins higher, supporting a bullish price target of $690. Others expect regulatory, execution, or political risks to weigh on future growth, resulting in a more cautious $510 target. Ultimately, Narratives put you in the driver’s seat, helping you make clearer decisions with a story that fits your outlook.

Do you think there's more to the story for Northrop Grumman? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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