Northrop Grumman has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 16.3% and now trades at $681.10. This run-up might have investors contemplating their next move.
Is now the time to buy Northrop Grumman, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Northrop Grumman Will Underperform?
We’re happy investors have made money, but we're swiping left on Northrop Grumman 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
A company’s long-term sales performance can indicate its overall 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 2.7% compounded annual growth rate. This was below our standards.
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Analyzing the trend in its profitability, Northrop Grumman’s operating margin decreased by 5.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 10.8%.
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 2.2% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
Final Judgment
Northrop Grumman doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 24.3× forward P/E (or $681.10 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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