NOC Northrop Grumman
Irreplaceable defense franchise with a wide moat, but a price implying ~9% growth leaves little margin of safety.
The business
Northrop Grumman designs and builds military aircraft (B-21 Raider), strategic missiles (Sentinel ICBM), solid rocket motors, space systems, satellites and defense electronics, almost all of it sold to the US government and allies. It earns cost-plus and fixed-price contract margins on multi-decade programs, then collects sustainment revenue for as long as the platforms stay in service.
Quality gate · 70/100
Moat & management
| Moat | wide moat |
| Source | regulatory |
| Trajectory | stable |
| Management | adequate |
Sole-source positions on generational programs (B-21, Sentinel, solid rocket motors), classified know-how and security clearances make it practically impossible for a new entrant to compete, and once a platform is chosen it is locked in for 30 to 50 years of production and sustainment. Returns are still capped by government pricing, and fixed-price development work can wipe out years of profit.
Management returns most free cash through steadily rising dividends and buybacks that have shrunk the share count about 2.5% a year, and keeps leverage sensible at about 1.7x net debt/EBITDA. Bidding fixed-price development work (the B-21 LRIP losses) and the Sentinel Nunn-McCurdy overrun show weaker discipline on underwriting risk.
Owner-earnings inputs
| Owner earnings (TTM) | 3.65B |
| Owner-earnings yield | 5.2% |
| Free-cash-flow yield | 5.2% |
| Growth used (normalized) | 7.0% |
| Market-implied growth (reverse DCF) | 8.5% |
| Terminal growth | 3.0% |
| Discount rate (hurdle) | 9.7% |
Projected owner earnings
| Yr | Owner earnings | Growth | PV |
|---|---|---|---|
| 1 | 3.90B | 7.0% | 3.56B |
| 2 | 4.16B | 6.6% | 3.45B |
| 3 | 4.41B | 6.1% | 3.34B |
| 4 | 4.66B | 5.7% | 3.22B |
| 5 | 4.90B | 5.2% | 3.09B |
| 6 | 5.14B | 4.8% | 2.95B |
| 7 | 5.36B | 4.3% | 2.81B |
| 8 | 5.57B | 3.9% | 2.66B |
| 9 | 5.76B | 3.4% | 2.51B |
| 10 | 5.93B | 3.0% | 2.35B |
Key risks
- Fixed-price production losses on B-21 and cost overruns or restructuring on Sentinel
- US defense budget politics, continuing resolutions and possible fiscal consolidation
- New-space and venture-backed defense entrants (SpaceX, Anduril, L3Harris/Aerojet in rocket motors) cutting into space and munitions share
Catalysts
- B-21 moving into full-rate production at better margins, plus allied demand for munitions and rocket motors
- Rising global defense spending and Golden Dome missile defense awards favoring NOC's space and sensor franchises
⚠ maintenance capex ≈ min(capex, D&A), capped at FCF · Price pays for ~9%/yr owner-earnings growth over 10y (reverse DCF); model credits 7%.