Northrop Grumman has been treading water for the past six months, recording a small loss of 2.1% while holding steady at $560.06. The stock also fell short of the S&P 500’s 7.1% gain during that period.
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Why Do We Think Northrop Grumman Will Underperform?
We're sitting this one out for now. Here are three reasons why NOC doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Northrop Grumman grew its sales at a sluggish 2.6% compounded annual growth rate. This was below our standards.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Northrop Grumman’s revenue to rise by 5.4%. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Northrop Grumman’s weak 3.1% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Northrop Grumman, we’ll be cheering from the sidelines. With its shares trailing the market in recent months, the stock trades at 20× forward P/E (or $560.06 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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