Northrop Grumman (NOC) has its hands in some of the biggest Pentagon contracts, including the B-21 bomber and F-35 stealth fighter, and is looking to add more. So is NOC stock a good buy? For the answer, take a look at the defense contractor’s earnings and the Northrop Grumman stock chart.
NOC Stock Fundamental Analysis
The Washington metro area-based company is a major subcontractor on the Lockheed Martin (LMT) F-35. It also produces drones such as the Global Hawk and increased its space offerings when it bought Orbital ATK in 2018. Northrop is also building the Air Force’s new B-21 stealth bomber.
In October, the defense contractor reported third-quarter results that beat analyst expectations. Northrop earnings climbed 7% to $5.89 per share beating Wall Street estimates for $5.60 per share. Revenue rose 7% to $9 billion, above views for $8.8 billion.
Northrop raised its full-year adjusted EPS outlook to $22.25 to $22.65 from a prior outlook of $22-$22.40. It now sees sales of $35.7 billion to $36 billion, up from $35.3 billion-$35.6 billion. Analysts see midpoint Northrop earnings per share of $22.57 and revenue of $35.5 billion.
Northrop earnings per share growth has averaged 9% over the past three years, according to IBD Stock Checkup. Three-year sales growth averaged 13%.
Investors should generally look for stocks with sustained earnings and sales growth of at least 25%. The defense contractor falls short on both counts.
NOC Stock Technical Analysis
Shares have formed a messy consolidation since April. Northrop stock has an official buy point of 385.10. But it has shown resistance around 350, according to MarketSmith chart analysis.
NOC stock is currently stuck below its 50-day and 200-day moving averages.
But NOC stock is also flashing some weakness in its CAN SLIM metrics. It has a 41 IBD Composite Rating out of a best-possible 99. The Composite Rating combines several proprietary IBD fundamental and technical ratings into a single score.
The best growth stocks often have a Composite Rating of at least 95 near the start of big runs. Northrop falls short.
The relative strength line, which measures the stock’s performance vs. the S&P 500, is at its lowest levels in nearly five years.
Air Force Wants More B-21 Bombers
The Air Force is spending heavily over the next several years to upgrade its fleet as aircraft age, and Northrop will benefit from the service’s spending spree.
The B-21 is the next-generation stealth bomber that will be the follow-on to the B-2 and replace aging Cold War-era Boeing (BA) B-52s.
Big defense programs are notorious for ballooning costs and missed schedules. But the Air Force Rapid Capabilities Office is managing the B-21 bomber to facilitate speedy development.
The B-21’s first flight was scheduled for December 2021. But the Air Force announced in August that the bomber’s first flight will take place no earlier than 2022.
On July 30, Northrop CEO Kathy Warden said the B-21 is scheduled to enter low-rate production in 2022 after reaching key developmental milestones.
But the first B-21 prototype is already under construction. In August, top defense and Air Force officials provided an update on its progress.
“The first test aircraft is being built, and it’s starting to look like an airplane,” said Randy Walden, Air Force Rapid Capabilities Office director and B-21 program chief.
“Suppliers from across the country are delivering parts that are coming together now. Aircraft programs will always have a few surprises early on, and we won’t be any different, but overall the B-21 Raider is coming along nicely.”
The Air Force has been vocal about plans to buy at least 100 of them, with total procurement costs estimated at about $100 billion, representing a long-term benefit to earnings and NOC stock.
The B-21 will be capable of carrying both traditional and nuclear weapons.
Contracts For Northrop Grumman Stock
Northrop also has the opportunity to win the lucrative contract to replace the ground-based leg of America’s Nuclear Triad.
After Boeing dropped out of the race, Northrop is the lone bidder for the Air Force’s Ground Based Strategic Deterrent (GBSD) contract. The initial contract is valued at $11 billion, but the total program is valued at $85 billion to $100 billion, marking another potential windfall for NOC stock.
New Air Force Chief of Staff Gen. Charles Brown told Defense News in November that nuclear modernization is one of his top three priorities, in addition to the Advanced Battle Management System and new acquisition tools.
Meanwhile, development of hypersonic missiles is a top priority for the Pentagon, and Northrop teamed up with Raytheon Technologies (RTX) last year to build engines for hypersonic weapons, which can travel more than five times the speed of sound.
Northrop’s 3D-printed scramjet engine will be used on Raytheon’s submission for the Hypersonic Air-Breathing Weapon Concept, which is a joint program between the Air Force and the Pentagon’s secretive DARPA research arm.
Meanwhile, Northrop is a top subcontractor on the Lockheed F-35, the most expensive military program ever. Northrop builds the stealthy fighter jet’s center fuselage, fire control radar and the communications and navigation system. Lockheed has said F-35 sales could follow the older F-16’s trajectory of 4,600 jets.
But delays continue with the jet. The Pentagon has said F-35 full-rate production may not be approved until early 2021, instead of the previous timeline of late 2019.
Northrop has also faced some setbacks in its space ambitions. Northrop was shut out of the Air Force’s five-year national security launch contract deal and now its OmegA rocket could be on the chopping block.
But Northrop provides engines for Boeing-Lockheed joint venture United Launch Alliance and is building the boosters for Boeing’s Space Launch System rocket.
Bottom Line On Northrop Grumman Stock
Northrop Grumman stock has sustained earnings and revenue growth potential with top Pentagon programs in the works, although recent performance has been choppy.
The Defense Department’s budget continues to enjoy bipartisan support in Congress, but the Covid-19 pandemic and the collapse in oil prices could hit foreign sales, especially from Mideast allies dependent on oil exports.
Shares are consolidating but Northrop Grumman is flashing weakness with its RS line and the stock is below its 50-day and 200-day line.
Bottom line: NOC stock is not a buy right now.
Investors looking for other top stocks to buy should focus on companies with superior earnings and strong stock performance, such as those on the prestigious IBD 50 list.
Gillian Rich on Twitter @IBD_GRich for defense news and more.
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