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Northrop Grumman (NOC) Up 1.1% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·4 min read

A month has gone by since the last earnings report for Northrop Grumman (NOC). Shares have added about 1.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Northrop Grumman due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Northrop Grumman Beats on Q3 Earnings, Ups '20 View

Northrop Grumman reported third-quarter 2020 earnings of $5.89 per share, which surpassed the Zacks Consensus Estimate of $5.60 by 5.2%. Moreover, the bottom line improved 7% from $5.49 reported in the year-ago quarter.

Total Sales

In third-quarter 2020, Northrop Grumman reported total sales of $9,083 million, which surpassed the Zacks Consensus Estimate of $8,838 million by 2.77%. Moreover, sales grew 7% from the year-ago quarter’s $8,475 million. The upside was driven by growth in majority of its business segments.

Backlog

Northrop Grumman’s total backlog at the end of third-quarter 2020 was $81.3 billion. Funded backlog during the quarter amounted to $33.3 billion, whereas unfunded backlog amounted to $48 billion.

Segmental Details

Effective Jan 1, 2020, Northrop made some structural changes in its reportable segments.

Aeronautics Systems: Segment sales of $2,914 million grew 7% year over year as a result of higher sales from both autonomous systems and manned aircraft.

Operating income improved 9% to $294 million, whereas operating margin expanded 40 basis points (bps) to 10.1%.

Mission Systems: Segment sales increased 10% to $2,551 million, driven by higher sales volumes from airborne sensors and network sales; increased navigation, targeting & survivability sales and elevated maritime/land systems & sensors sales.

Operating income rose 5% to $370 million, while operating margin contracted 70 bps to 14.5%.

Defense Systems: Sales in this segment declined 4% to $1,859 million due to lower volumes in mission readiness and battle management & missile system programs.

Operating income increased 8% to $217 million, while operating margin expanded 130 bps to 11.7%.

Space Systems: Space Systems’ third-quarter 2020 sales increased 17% to $2,198 million owing to higher sales from both Space and Launch & Strategic Missiles programs.

The segment’s operating income improved 17% to $224 million, with operating margin expanding 10 bps to 10.2%.

Operational Update

Total operating costs and expenses at the end of the quarter were $8,098 million, up 7.6% from the year-ago quarter’s $7,524 million.

Operating income during the quarter improved 3.6% year over year to $985 million.

Financial Condition

Northrop Grumman’s cash and cash equivalents as of Sep 30, 2020, were $4,995 million, up from $2,245 million as of Dec 31, 2019.

Long-term debt (net of current portion) as of Sep 30, 2020, was $14,260 million, up from $12,770 million as of Dec 31, 2019.

Net cash inflow from operating activities as of Sep 30, 2020, was $2,703 million compared with $1,833 million as of Sep 30, 2019.

2020 Guidance

Northrop Grumman raised its 2020 financial guidance and expects to generate revenues of $35.7-$36 billion. The Zacks Consensus Estimate for the company’s full-year sales, pegged at $35.5 billion, lies below its projected view.

It expects free cash flow of $3.3-$3.6 billion for 2020.

Northrop Grumman has also raised its full-year earnings expectations from $22.00-$22.40 to $22.25-$22.65 per share. The Zacks Consensus Estimate for the company’s 2020 earnings, pegged at $22.46 per share, lies above the midpoint of the company’s guidance range.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Northrop Grumman has a great Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. It's no surprise Northrop Grumman has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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