Northrop Grumman Corporation (NOC)

Conclusion

Northrop Grumman is a United States aerospace and defense technology company, organised into four segments: Aeronautics Systems, Defense Systems, Mission Systems and Space Systems. At 539.07 USD per share on 9 November 2026, its market capitalisation is 76.6 billion USD.

The verdict is fair. The stock trades below its own ten-year medians on four of five multiples: price to earnings is 16.9x against a median of 17.9x, and price to free cash flow is 20.0x against 27.6x. The discounted cash flow gives 422.58 USD per share, at a discount rate of 8.87%. The fair value band runs from 401.13 to 601.70 USD with a midpoint of 501.42 USD, a margin of safety of -7.0% at the current price. The reverse DCF implies revenue growth of 5.8% a year, while revenue actually grew 2.7% a year over five years and free cash flow per share grew 6.0% a year.

What supports the case is a strong balance sheet, with an Altman Z-score of 3.13 and interest coverage of 9.0x, and a return on invested capital of 15.4% against a weighted cost of capital of 8.0%. The weakest numbers are free cash flow conversion over five years, at 52.2%, and a one-year earnings per share decline, at -2.6% a year over three years. Net debt to EBITDA of 1.7x is a manageable but visible load. Should cash conversion stay weak or earnings keep falling, the discount to historical multiples would likely not close.

Financial health

Financial strength is green: the Altman Z-score, net debt to EBITDA, interest coverage and the current ratio are all assessed as good. The current ratio is 1.23 and the quick ratio is 1.00. Net debt to EBITDA is 1.7x, debt to equity is 0.89 and interest coverage is 9.0x. The Altman Z-score is 3.13, in the safe zone. Insolvency risk: low, about 0.7% by the estimate of the Ohlson model over one to two years. Debt has fallen slightly over the last five years, with debt versus revenue growth at -0.7% a year.

Earnings quality

Earnings quality is yellow. Free cash flow conversion is 84.7% on a trailing basis but only 52.2% over five years, which is the weakest signal. The accrual ratio is -1.1%, which points to cash earnings exceeding reported earnings. Stock-based compensation is 0.3% of revenue, and free cash flow after it is 3.7 billion USD. The share count has fallen by 3.0% a year over five years, reflecting buybacks. The Piotroski score is 6 out of 9. The Beneish M-score is not available. Northrop beat earnings estimates in seven of the last eight quarters, with an average surprise of 2.4%. Estimates for next year have been revised down by 1.4% over 90 days.

Profitability

Profitability is green. The gross margin is 20.0% against a ten-year median of 20.9%, the operating margin is 10.1% against 11.4%, and the net margin is 10.4% against 9.5%. Margin stability is 20.5%. Return on invested capital is 15.4%, against a weighted cost of capital of 8.0%, and the given gap is 7.4 points, a value-creating spread. The five-year median return on invested capital is 14.8%. Return on equity is 24.2%, but the DuPont split shows that leverage contributes: a net margin of 10.0%, asset turnover of 0.82 and an equity multiplier of 3.08. Return on equity is therefore flattered by the balance sheet rather than by margins alone.

Growth

Growth is green. Revenue has compounded at 4.7% a year over three years, 2.7% over five years and 6.0% over ten years. Revenue grew in nine of the last ten comparable years. Earnings per share fell 2.6% a year over three years, but rose 8.9% over five years and 10.9% over ten years. Free cash flow per share compounded at 34.6% over three years, 6.0% over five and 10.1% over ten. The three-year figures are flattered by a low base, so the longer periods give a more reliable picture.

Valuation

Valuation is yellow. Against their own ten-year medians, the price to earnings multiple is 16.9x against 17.9x, a premium of -5.6%. Enterprise value to EBITDA is 12.1x against 12.9x, -6.1%. Price to free cash flow is 20.0x against 27.6x, -27.4%. Price to sales is 1.76x against 1.71x, 2.6%. Price to book is 4.10x against 5.26x, -22.0%. The discounted cash flow gives 422.58 USD per share, using a discount rate of 8.87%. The fair value from historical multiples is 580.26 USD. The fair value band runs from 401.13 to 601.70 USD, midpoint 501.42 USD, with a margin of safety of -7.0%. The reverse DCF implies growth of 5.8% a year, against 2.7% delivered over five years. The fair value is an order of magnitude built on fixed assumptions, not a price target. The dividend yield is 1.8% and the payout on free cash flow is 35.6%.

Risks

Weak cash conversion is the main risk. If the five-year conversion of 52.2% persisted, free cash flow would not support the valuation implied by the discounted cash flow. Falling earnings per share over three years and downward revisions to next year's estimates could erode confidence in the growth the reverse DCF implies. Net debt to EBITDA of 1.7x limits flexibility if defence budgets or margins weaken. The Beneish M-score is not available, and the company does not report a debt maturity schedule or revenue by segment, so the debt profile and the segment mix cannot be checked here. The valuation rests on fixed assumptions, and the historical multiples may not be a reliable anchor.