Northrop Grumman’s stock price has taken a beating over the past six months, shedding 31.2% of its value and falling to $483.60 per share. This may have investors wondering how to approach the situation.

Is now the time to buy Northrop Grumman, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Northrop Grumman Will Underperform?

Even with the cheaper entry price, we don’t have much confidence in Northrop Grumman. Here are three reasons you should be careful with NOC, plus one stock we’d rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

In addition to reported revenue, organic revenue is a useful data point for analyzing Defense Contractors companies. This metric gives visibility into Northrop Grumman’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Northrop Grumman’s organic revenue averaged 5.8% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Northrop Grumman’s revenue to rise by 5.9%. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

3. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.

Northrop Grumman’s weak 2.4% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Final Judgment

We see the value of companies helping their customers, but in the case of Northrop Grumman, we’re out. After the recent drawdown, the stock trades at 16.5× forward P/E (or $483.60 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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