NOC Northrop Grumman
Classified-moat defense prime compounding with the Pentagon budget; durable, but buy it cheap.
The story
Northrop Grumman is one of five U.S. defense primes, an oligopoly protected by classified program access, security clearances, and decades-long platform cycles (B-21 bomber, Sentinel ICBM). It is a mature, budget-tied business: revenue grows with Washington appropriations, not end markets. The 2023 B-21 fixed-price charge crushed margins to 7.4%; they have since rebuilt to ~13.8%, near the sustainable ceiling for government cost-plus/fixed-price contracting. This is a cash-generative franchise in steady state, not a growth company.
Growth of ~5% fading to 2.5% tracks nominal defense budget growth plus NATO rearmament tailwinds, nothing more. Target margin of 14% sits just above the rebuilt 13.8% and well below the 17.3% EAC-flattered 2021 peak, respecting government-contracting economics; the B-21 charge proved peak margins are not repeatable. Beta of 0.9 (below the 1.2 industry anchor) reflects NOC's historically countercyclical demand, and sales-to-capital of 1.4 matches its light-capex model.
Value drivers
| Revenue growth (Y1) | 5.0% |
| Terminal growth | 2.5% |
| Forecast horizon | 8y |
| Target operating margin | 14.0% |
| Years to target margin | 5 |
| Sales-to-capital | 1.40 |
| Beta | 0.90 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 8.4% |
| Terminal WACC | 8.8% |
Valuation bridge
| PV of explicit FCFF | 25.56B |
| PV of terminal value | 47.06B |
| Equity value | 61.24B |
| ÷ shares → per share | $431.07 |
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Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 45.04B | 5.0% | 13.8% | 5.14B | 1.53B | 3.61B | 3.33B |
| 2 | 47.13B | 4.6% | 13.9% | 5.40B | 1.49B | 3.90B | 3.32B |
| 3 | 49.15B | 4.3% | 13.9% | 5.65B | 1.44B | 4.20B | 3.30B |
| 4 | 51.08B | 3.9% | 14.0% | 5.88B | 1.38B | 4.50B | 3.26B |
| 5 | 52.90B | 3.6% | 14.0% | 6.11B | 1.30B | 4.81B | 3.21B |
| 6 | 54.60B | 3.2% | 14.0% | 6.31B | 1.21B | 5.09B | 3.13B |
| 7 | 56.16B | 2.9% | 14.0% | 6.49B | 1.11B | 5.37B | 3.05B |
| 8 | 57.57B | 2.5% | 14.0% | 6.65B | 1.00B | 5.65B | 2.96B |
Key risks
- Further fixed-price contract losses on B-21 and Sentinel ICBM restructuring
- Defense budget politics: continuing resolutions, sequestration, program cancellations
- Margin ceiling: government negotiators claw back excess profits on sole-source programs
Catalysts
- B-21 production ramp and European/NATO rearmament lifting revenue above budget trend
- Sentinel EAC settlement converting a loss program back to steady cash flow