Is It Too Late To Consider Northrop Grumman (NOC) After A 47% One Year Gain?

• For investors considering whether Northrop Grumman at around US$702.50 per share still offers value, or whether most of the opportunity is already reflected in the price, this article reviews what the numbers indicate.
• The stock has returned 3.5% over the last 7 days, while the 30 day return is a 5.1% decline, set against a 20.0% year to date gain and a 47.0% return over the last year.
• These moves are directing attention back to Northrop Grumman's role as a major US defense contractor, as investors consider longer term defense spending priorities and contract pipelines. Broader sector headlines and periodic contract announcements are helping to frame how the current share price compares with expectations.
• Simply Wall St currently gives Northrop Grumman a value score of 3/6. The rest of this article compares what different valuation approaches suggest about that score, and then introduces a way to interpret valuation that can be more informative than a single number.

Find out why Northrop Grumman's 47.0% return over the last year is lagging behind its peers.

Approach 1: Northrop Grumman Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model looks at the cash Northrop Grumman is expected to generate in the future, then discounts those projected cash flows back to today to estimate what the business might be worth now.

For Northrop Grumman, the latest twelve months Free Cash Flow is about $3.0b. The model used here is a 2 Stage Free Cash Flow to Equity approach, which first uses analyst estimates and then extends the projections. For example, Simply Wall St uses analyst and extrapolated figures that reach an estimated Free Cash Flow of about $4.0b by 2030, with annual projections between 2026 and 2035 discounted back to today.

On this basis, the DCF model used here produces an estimated intrinsic value of about $534.92 per share. The current share price is roughly $702.50. The difference between these figures implies the shares are around 31.3% above the model’s estimate of fair value. This suggests the current price reflects relatively optimistic expectations.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Northrop Grumman may be overvalued by 31.3%. Discover 59 high quality undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Northrop Grumman.

Approach 2: Northrop Grumman Price vs Earnings

For profitable companies, the P/E ratio is a useful way to think about what you are paying for each dollar of current earnings, which makes it a straightforward check on how the market is pricing the business today.

What counts as a “normal” or “fair” P/E usually reflects how fast earnings are expected to grow and how risky those earnings are perceived to be. Higher expected growth and lower risk often go with higher multiples, while slower growth or higher risk tend to pull them down.

Northrop Grumman currently trades on a P/E of 23.84x. That sits below the Aerospace & Defense industry average P/E of about 35.89x and also below the peer average of 49.90x. Simply Wall St also calculates a proprietary “Fair Ratio” of 27.68x for Northrop Grumman, which is the P/E level suggested after considering factors such as its earnings growth profile, industry, profit margin, market cap and risk characteristics.

This Fair Ratio can be more informative than a simple comparison with peers because it is tailored to the company’s own fundamentals rather than broad group averages. With the current P/E of 23.84x below the Fair Ratio of 27.68x, the shares screen as undervalued on this metric.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Northrop Grumman Narrative

Earlier it was mentioned that there is an even better way to understand valuation. On Simply Wall St this comes through Narratives, where you set out your story for Northrop Grumman, link that story to concrete forecasts for revenue, earnings and margins, and arrive at your own fair value. You can then compare this with the current price on the Community page, with the Narrative automatically updating as new earnings or news arrive. One investor might build a Narrative closer to the bullish US$815 price target, while another aligns with the cautious US$587.22 view. Both can quickly see whether their fair value suggests the stock is above or below their required level for action.

Do you think there's more to the story for Northrop Grumman? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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