Summary
Based on my analysis, the share price is worth north of ~$380 per share based on a 21 times earnings multiple.
Aerospace is driving success with production ramps of F-35 and the potential to modernize radar and sensor systems on F-16 and F-18 to give them modern day fighting capability.
Pension contributions coupled with plan asset return uncertainty have raised questions about future year cash flows.
A high debt load with low cash levels from the Orbital ATK acquisition overhang the longer-term positive investment thesis.
The Opportunity
Northrop Grumman (NOC) stock continues to slide after the Q3 earnings report and is down 25% from all-time highs reached earlier this year. The entire defense industry is dropping as the (ITA) Defense and Aerospace ETF is near flat on the year with a positive return of 1.8%. Northrop Grumman is the laggard in the industry with a negative return of 12% YTD, compared to peers Boeing (BA), Lockheed Martin (LMT) and Raytheon (RTN) returning +11.3%, -6.3% and -4.3% respectively.
I believe this performance disconnect creates an opportunity for investors to acquire shares at attractive levels. Based on my analysis using a 21 times 2019 earnings multiple, I believe Northrop Grumman is worth north of $380 a share. Investors with a longer term investment horizon could be rewarded as Northrop Grumman continues to exhibit operational strength in a strong defense spending environment.
