Northrop Grumman (NYSE:NOC) Misses Q3 Revenue Estimates

Security and aerospace company Northrop Grumman (NYSE:NOC) fell short of the market’s revenue expectations in Q3 CY2024 as sales rose 2.3% year on year to $10.00 billion. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $41.2 billion at the midpoint.

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Company Overview

Responsible for the development of the first stealth bomber, Northrop Grumman (NYSE:NOC) specializes in providing aerospace, defense, and security solutions for various industry applications.

Defense Contractors

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Northrop Grumman’s sales grew at a sluggish 4.3% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Northrop Grumman’s annualized revenue growth of 7.9% over the last two years is above its five-year trend, suggesting some bright spots.

This quarter, Northrop Grumman’s revenue grew 2.3% year on year to $10.00 billion, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.5% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates the market believes its products and services will see some demand headwinds.

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Operating Margin

Northrop Grumman has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.8%.

Looking at the trend in its profitability, Northrop Grumman’s annual operating margin decreased by 4.4 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Northrop Grumman become more profitable in the future.

This quarter, Northrop Grumman generated an operating profit margin of 11.2%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Cash Is King

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Northrop Grumman has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.1% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Northrop Grumman’s margin dropped by 4.9 percentage points during that time. Northrop Grumman’s five-year free cash flow profile was compelling, but shareholders are surely hoping for its trend to reverse.

Northrop Grumman’s free cash flow clocked in at $730 million in Q3, equivalent to a 7.3% margin. The company’s cash profitability regressed as it was 1.6 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Key Takeaways from Northrop Grumman’s Q3 Results

We enjoyed seeing Northrop Grumman exceed analysts’ EBITDA expectations this quarter. On the other hand, its revenue unfortunately missed. Offsetting this was the fact that the company maintained its full year revenue guidance, signaling that despite a miss this quarter, the company is on track to more or less meet expectations for the full year. Overall, this was a mixed quarter with reconfirmed revenue guidance comforting the market. The stock traded up 1.2% to $522.25 immediately following the results.

Big picture, is Northrop Grumman a buy here and now?We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.