Security and aerospace company Northrop Grumman (NYSE:NOC) missed Wall Street’s revenue expectations in Q4 CY2024, with sales flat year on year at $10.69 billion. The company’s full-year revenue guidance of $42.25 billion at the midpoint came in 1.3% below analysts’ estimates. Its GAAP profit of $8.66 per share was 36% above analysts’ consensus estimates.

Is now the time to buy Northrop Grumman? Find out in our full research report.

Company Overview

Responsible for the development of the first stealth bomber, Northrop Grumman (NYSE:NOC) specializes in providing aerospace, defense, and security solutions for various industry applications.

Defense Contractors

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Sales Growth

A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Over the last five years, Northrop Grumman grew its sales at a sluggish 3.9% compounded annual growth rate. This was below our standard for the industrials sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Northrop Grumman’s annualized revenue growth of 5.9% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Northrop Grumman’s $10.69 billion of revenue was flat year on year, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 4.2% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Northrop Grumman has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.7%.

Analyzing the trend in its profitability, Northrop Grumman’s operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.

This quarter, Northrop Grumman generated an operating profit margin of 11.2%, up 14.9 percentage points year on year. This increase was a welcome development and shows it was recently more efficient because its expenses grew slower than its revenue.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Northrop Grumman’s EPS grew at a spectacular 16.6% compounded annual growth rate over the last five years, higher than its 3.9% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

We can take a deeper look into Northrop Grumman’s earnings to better understand the drivers of its performance. A five-year view shows that Northrop Grumman has repurchased its stock, shrinking its share count by 13.4%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Northrop Grumman, its two-year annual EPS declines of 5.2% mark a reversal from its (seemingly) healthy five-year trend. We hope Northrop Grumman can return to earnings growth in the future.

In Q4, Northrop Grumman reported EPS at $8.66, up from negative $3.54 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Northrop Grumman’s full-year EPS of $28.35 to shrink by 1.2%.

Key Takeaways from Northrop Grumman’s Q4 Results

We liked that Northrop Grumman beat analysts’ EBITDA and EPS expectations this quarter. On the other hand, its revenue missed and its full-year revenue guidance fell slightly short of Wall Street’s estimates. Zooming out, we this quarter could be better, especially as sentiment on the sector sours due to the Trump administrations stated aims of increased efficiency and scrutiny of government spending, which could mean lower revenues for Northrop Grumman and its peers. The stock remained flat at $481.34 immediately after reporting.

Should you buy the stock or not? We think that the latest quarter is just one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.