The stock of Northrop Grumman Corp (NYSE:NOC) has seen a daily gain of 10% and a 3-month loss of -6.78%. With an Earnings Per Share (EPS) of 30.14, the question arises: is the stock fairly valued? This article provides a comprehensive valuation analysis to help answer this question. Let's delve into the details.
Northrop Grumman is a diversified defense contractor that provides aeronautics, defense, mission, and space systems. The company's aerospace segment creates the fuselage for the massive F-35 program and produces autonomous and piloted aircraft such as Global Hawk drones and the new B-21 bomber. Defense systems make artillery and missile ammunition and guidance systems, missile defense systems, and conduct maintenance and upgrades on numerous military aircraft. Mission systems create and integrate a variety of radar, navigation, and communication systems for avionics, weapons control, and countermeasures on a range of platforms from helicopters to destroyers. Finally, space systems produce satellites, sensors, space structures, and manufacture long-range missiles and rocket motors.
With the current stock price at $465.57 and a market cap of $70.40 billion, the GF Value of $443.29 suggests that Northrop Grumman (NYSE:NOC) is fairly valued. Let's explore this valuation further.
Understanding the GF Value
The GF Value is a unique measure that estimates the intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line on the summary page provides a snapshot of the fair value at which the stock should ideally be traded.
Northrop Grumman Corp (NYSE:NOC) appears to be fairly valued according to the GF Value calculation. This suggests that the long-term return of its stock is likely to be close to the rate of its business growth.
Investing in companies with low financial strength can lead to permanent capital loss. Therefore, it's crucial to review a company's financial strength before buying shares. Northrop Grumman has a cash-to-debt ratio of 0.22, which ranks worse than 70.31% of 293 companies in the Aerospace & Defense industry. Based on this, GuruFocus ranks Northrop Grumman's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. Northrop Grumman has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $37.90 billion and Earnings Per Share (EPS) of $30.14. Its operating margin is 9.67%, which ranks better than 64.63% of 294 companies in the Aerospace & Defense industry. Overall, GuruFocus ranks the profitability of Northrop Grumman at 9 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Northrop Grumman is 5.7%, which ranks better than 61.36% of 264 companies in the Aerospace & Defense industry. The 3-year average EBITDA growth is 24.6%, which ranks better than 81.74% of 230 companies in the Aerospace & Defense industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Northrop Grumman's ROIC was 7.75, while its WACC came in at 5.59.
In summary, the stock of Northrop Grumman (NYSE:NOC) shows every sign of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 81.74% of 230 companies in the Aerospace & Defense industry. To learn more about Northrop Grumman stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
This article first appeared on GuruFocus.