The defense industry is experiencing one of the strongest demand cycles in recent times. Despite that, Northrop Grumman Corporation (NYSE:NOC)’s shares are down over 11% for the year, as of October 15, which has pushed the stock’s valuation below its own historical multiples and the sector median.
This raises the question about whether the market is punishing a weakness in the business or the stock’s recent lumpiness.
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Industry Trends
Ongoing geopolitical conflicts support the sector as global military expenditure rises and NATO member nations commit to spending an increased percentage of their GDP on defense.
Northrop Grumman Corporation (NYSE:NOC) remains an important player, especially with its B-21 Raider, tactical missiles, Sentinel ICBM, and other critical programs. It continues to receive high-value contracts, such as the $4.8 billion Army contract secured last month.
That said, increasing production levels and rising cost of materials could pressure profits, especially on fixed-price programs.
The stock has been sliding this year due to margin pressures, contract losses, and uncertainty around future U.S. defense spending.
Recent Financial Results
The defense contractor reported sales of $10.88 billion for the second quarter, up 10% sequentially, 5% year-over-year, and above analyst estimates of $10.81 billion.
Earnings per share of $7.68 also beat Wall Street’s forecast, but were down from $8.15 a year earlier, when the company received a $1.04 benefit from the divestiture of its training services business.
Following the results, NOC lifted its guidance for sales and adjusted profit for the full year. Sales are now expected between $43.75 billion and $44.25 billion, representing an increase of $250 million, while adjusted EPS is anticipated in the range of $28.60 to $29.10, up by $1.20 from the previous forecast.
However, some analysts have attributed the earnings beat in Q2 to a lower tax rate.
Operating margin was another major weak point, which dropped from 13.8% in the prior year’s period to 10.1%. Reasons include the divestiture benefit from last year not repeating and a $91 million unfavorable charge on the GEM 63XL program during the quarter.
Adjusted free cash flow grew 54% year-over-year despite a 31% increase in capital expenditure. The company plans on spending 4.5% of sales on capital expenditure in 2027 and 2028 as it ramps up B-21 production, which could impact future free cash flow growth.
