Northrop Grumman Corp (NYSE:NOC) has recently experienced a daily gain of 1.74%, despite a 3-month loss of -1.37%. With an Earnings Per Share (EPS) of 30.14, the question arises: Is the stock fairly valued? In this article, we will delve into an in-depth analysis of Northrop Grumman’s valuation. Read on to discover if this could be a worthwhile investment for you.
Northrop Grumman is a leading defense contractor that offers a diversified portfolio of aeronautics, defense, mission, and space systems. The company’s aerospace segment is responsible for the fuselage of the F-35 program and produces both autonomous and piloted aircraft. Its defense systems segment specializes in artillery and missile ammunition, guidance systems, and missile defense systems. The mission systems segment integrates radar, navigation, and communication systems for avionics, weapons control, and countermeasures. Finally, the space systems segment produces satellites, sensors, space structures, and manufactures long-range missiles and rocket motors.
With a current share price of $436.65, it’s important to compare this figure to the company’s estimated fair value or GF Value. This will give us a clearer picture of whether the stock is overvalued, undervalued, or fairly valued.
Understanding GF Value
The GF Value is a unique measure of a stock’s intrinsic value. It is based on three factors: historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above or below the GF Value Line, it may be overvalued or undervalued, respectively.
According to GuruFocus, Northrop Grumman (NYSE:NOC) is fairly valued. The stock’s fair value is estimated based on historical multiples, an internal adjustment based on past business growth, and analyst estimates of future business performance. If the stock price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns. At its current price of $436.65 per share, Northrop Grumman stock is believed to be fairly valued.
Because Northrop Grumman is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Investing in companies with poor financial strength carries a higher risk of permanent capital loss. Therefore, it’s crucial to carefully review a company’s financial strength before deciding to buy its stock. A good starting point for understanding a company’s financial strength is to look at its cash-to-debt ratio and interest coverage. Northrop Grumman has a cash-to-debt ratio of 0.22, which is worse than 68.47% of companies in the Aerospace & Defense industry. GuruFocus ranks the overall financial strength of Northrop Grumman at 6 out of 10, indicating that the company’s financial strength is fair.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. 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 67.49% of companies in the Aerospace & Defense industry. Overall, GuruFocus ranks the profitability of Northrop Grumman at 9 out of 10, indicating strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Northrop Grumman is 5.7%, which ranks better than 62.45% of companies in the Aerospace & Defense industry. The 3-year average EBITDA growth rate is 24.6%, which ranks better than 81.06% of companies in the Aerospace & Defense industry.
ROIC vs WACC
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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 5.25.
In summary, the stock of Northrop Grumman (NYSE:NOC) is believed to be fairly valued. The company’s financial condition is fair, and its profitability is strong. Its growth ranks better than 81.06% of 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 first appeared on GuruFocus.