Even though Northrop Grumman’s stock ($487.50 per share) has gained 7% over the last six months, it has lagged the S&P 500’s 13.4% return during that period. This might have investors contemplating their next move.
Is now the time to buy Northrop Grumman, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.We're cautious about Northrop Grumman. Here are three reasons why NOC doesn't excite us and one stock we'd rather own today.
Why Do We Think Northrop Grumman Will Underperform?
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.
1. Long-Term Revenue Growth Disappoints
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 multiple years. Unfortunately, Northrop Grumman’s 4.3% annualized revenue growth over the last five years was sluggish. This was below our standard for the industrials sector. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Northrop Grumman’s margin dropped by 4.9 percentage points over the last five years. Northrop Grumman’s five-year free cash flow profile was compelling, but shareholders are surely hoping for its trend to reverse. Its free cash flow margin for the trailing 12 months was 6.1%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Unfortunately, Northrop Grumman’s ROIC has decreased significantly over the last few years. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Northrop Grumman falls short of our quality standards. With its shares trailing the market in recent months, the stock trades at 18.3x forward price-to-earnings (or $487.50 per share). This valuation tells us a lot of optimism is priced in - we think there are better investment opportunities out there. Let us point you towards Deere, the leading supplier of autonomous agriculture equipment.
Stocks We Like More Than Northrop Grumman
The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.
Get started by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like Comfort Systems (+783% five-year return). Find your next big winner with StockStory today for free.
