Latest Developments:
Northrop Grumman reported 3Q24 revenues of $9.9 billion (+2.26% y/y, -2.17% q/q), with growth across all segments except Space Systems (-3% y/y). Operating and net margins improved by 81bps and 68bps y/y, respectively. NOC raised FY24 guidance, forecasting $41.2 billion in sales (+4.86% y/y) and $2.45 billion in free cash flow (+16.67% y/y). Net awards for the quarter totaled $11.7 billion, increasing the backlog to $85 billion.

Investment Case:
NOC is poised to benefit from global defense budget increases, driven by heightened geopolitical tensions across Europe, the Middle East, and Asia. Management forecasts consistent demand with a book-to-bill ratio of 1.6x domestically and 2x internationally. Operating margins have rebounded to 10.81% YTD, marking the first margin expansion in eight years. NOC’s consistent cash flow generation supports shareholder returns, with a 31% reduction in share count and a 12% dividend CAGR over the last decade.

Valuation:
A DCF model implies an intrinsic value of $502 per share, reflecting only a 4.5% upside under optimistic assumptions of improving margins and 3.5% annual revenue growth through FY28. However, risks from a potential trade war or China’s export ban on critical minerals like Gallium could reverse margin gains, potentially driving an 11% downside.

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