Northrop Grumman NYSE: NOC

Northrop Grumman had fallen roughly 12% after earnings into a period of the largest announced defence-spending increases since 2009. Was the market pricing a contractor whose revenue is 85–90% locked into long-term government programmes for the demand it was about to receive?

Why the opportunity existed

The stock had fallen about 12% after earnings on worries about Sentinel and B-21 programme costs, inside a wider valuation reset that also hit Lockheed and RTX. Our argument was that the Street was underrating Northrop's long-term earnings power: consensus indicated flat revenue and very modest growth, and we thought growth would accelerate as the major long-term contracts moved into production and scaled up.

Forecast years are shown in a lighter weight. Present value of the explicit forecast period: $30,857M.

Terminal value and the target

Shading is the implied return against the $473.20 share price at the time: green above, red below. The base case is outlined.

$ millions, LTM at 25 April 2025. Chosen multiple: EV/Revenue 2.7x, giving an implied $587.12 (+24.1%). EV/Revenue was selected as the primary metric because Boeing's negative operating income made EV/EBITDA and EV/FCF unusable across the set.

Entry price, April 2025

$473.20

Price target

$697.72

52-week high

$774.00 — target exceeded

Price, 18 March 2026

~$735, +29% year-to-date

Price, 14 September 2026

$527.39 — +11.5% against entry

Backlog, FY2024 (in the pitch)

$91.5B

Backlog, FY2025 close

$95.7B

Backlog, 2026

$104.7B

The demand thesis held and kept holding. What moved the stock down was the other side of the ledger. On 21 July 2026 Northrop raised 2026 sales guidance to $43.75–44.25B and MTM-adjusted EPS to $28.60–29.10, and the stock fell anyway: segment operating margin came in at 10.6% against 11.8%, segment operating income fell 5%, and the EPS beat rested on a 6.3% tax rate versus 17.7% rather than on operations, alongside a $68M Defense Systems adjustment and a $91M Space Systems charge on a rocket-motor redesign.

Forecast against outcome

2026 revenue, forecast in this model

$44,215M

2026 revenue, company guidance midpoint

$44,000M

Forecast versus guidance midpoint

0.49% above guidance; guidance is not an actual result

EBIT margin assumed, 2025 → 2034

10.9% → 11.4%, drifting up

Segment operating margin, Q2 2026

10.6%, down from 11.8%

As of 14 September 2026. Source: Public market data and Northrop Grumman disclosures.

Northrop Grumman Q2 2026 results — Form 8-K, 21 July 2026

The model arithmetic reconciles to the presentation. The following data corrections, assumptions and missing reconciliations affect how its valuation should be interpreted.

1. Model correction

   Update the L3Harris revenue input and recompute the comparison

   The deck lists L3Harris FY2024 revenue as $11,107.2M, compared with reported revenue of $21.3B. That input raises its EV/Revenue multiple to 6.7x and influences the selected peer mean of 2.7x. Correcting it reduces the mean to approximately 2.0–2.1x, compared with Northrop at 2.2x. The original 24.1% undervaluation conclusion therefore needs to be revised.

   Source: L3Harris Technologies full-year 2024 results, January 2025

2. Methodological assumption

   Test a wider range of exit multiples

   The model uses a 17.24x exit multiple. The highest LTM EV/EBITDA in the deck’s peer table is 16.0x for Airbus, compared with 13.7x for Northrop. The perpetuity method implies 18.04x, but both methods use the same 6.55% WACC. Their agreement does not independently validate the terminal assumptions.

3. Methodological assumption

   Valuation depends heavily on terminal assumptions

   Terminal value contributes $84,520M of the $115,377M enterprise value under the perpetuity method — approximately 73%. The sensitivity table gives $487.65 per share at an 8% WACC and 3% terminal growth, compared with the $473.20 reference price. This dependence should be considered when interpreting the price target.

4. Model correction

   Clarify the market risk premium label

   The 7.04% cost of equity calculation uses a 4.31% risk-free rate, a 0.63 beta and a 4.33% market risk premium. The slide labels 8.64% as the premium, although that value represents the expected market return in the calculation. The label needs correction so the stated assumptions match the formula.

5. Model correction

   Reconcile EBIT across the financial statements and DCF

   For FY2022, the income statement page shows EBIT of $6,338M, while the DCF uses $3,601M. The series differ in other years as well. The presentation does not provide a reconciliation. Any normalization adjustments need to be documented before the difference can be explained.

6. Methodological assumption

   Document the working-capital forecast drivers

   Forecast changes in net working capital move from −$53M in 2027 to +$1,410M in 2028 and +$1,266M in 2029, then back to +$102M. These movements affect free cash flow, but the deck does not state the operating assumptions behind them. The next step is to document those drivers and test their effect on valuation.

The demand thesis was right and stayed right. Backlog went from $91.5B to $104.7B, and the stock passed my $697.72 target inside a year, reaching $774.

Three things I would change. First, I set a price target with no time horizon and no sell discipline, so being right and knowing what to do about it were never connected.

Second, I forecast revenue off the defence budget and let margin drift upward, from 10.9% to 11.4%. My own income statement page showed operating margin at 10.6%, 6.5% and 9.8% across three years and EBITDA swinging from $8.7B to $3.9B to $6.8B. I put that volatility in the bull case rather than the risk case, and I sensitized WACC and terminal growth but never margin. When the stock fell in July 2026 it fell on margin and execution while guidance was being raised — the one line I had not stress-tested.

Third, I chose the mean of a comp set over the median without checking the outlier that produced it. That is a five-minute check I did not do.