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Security and aerospace company Northrop Grumman (NYSE:NOC) beat analysts' expectations in Q2 CY2024, with revenue up 6.7% year on year to $10.22 billion. The company expects the full year's revenue to be around $41.2 billion, in line with analysts' estimates. It made a GAAP profit of $6.36 per share, improving from its profit of $5.34 per share in the same quarter last year.
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Northrop Grumman (NOC) Q2 CY2024 Highlights:
- Revenue: $10.22 billion vs analyst estimates of $10.02 billion (2% beat)
- EPS: $6.36 vs analyst estimates of $5.91 (7.6% beat)
- Slightly upgraded its full-year revenue and EPS guidance
- The company reconfirmed its revenue guidance for the full year of $41.2 billion at the midpoint
- Free Cash Flow of $1.11 billion is up from -$976 million in the previous quarter
- Market Capitalization: $65.43 billion
Defense ContractorsDefense 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 GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Regrettably, Northrop Grumman's sales grew at a weak 4.4% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Northrop Grumman's annualized revenue growth of 8% over the last two years is above its five-year trend, suggesting some bright spots.
This quarter, Northrop Grumman reported solid year-on-year revenue growth of 6.7%, and its $10.22 billion of revenue outperformed Wall Street's estimates by 2%. Looking ahead, Wall Street expects sales to grow 3.1% over the next 12 months, a deceleration from this quarter.
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 expenses well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.8%.
Analyzing the trend in its profitability, Northrop Grumman's annual operating margin decreased by 4.7 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Northrop Grumman become more profitable in the future.
This quarter, Northrop Grumman generated an operating profit margin of 10.7%, in line with the same quarter last year. This indicates the company's overall cost structure has been relatively stable.
EPS Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Sadly for Northrop Grumman, its EPS declined by 4.5% annually over the last five years while its revenue grew by 4.4%. This tells us the company became less profitable on a per-share basis as it expanded.
Diving into the nuances of Northrop Grumman's earnings can give us a better understanding of its performance. As we mentioned earlier, Northrop Grumman's operating margin was flat this quarter but declined by 4.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Northrop Grumman, its two-year annual EPS declines of 34.7% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q2, Northrop Grumman reported EPS at $6.36, up from $5.34 in the same quarter last year. This print beat analysts' estimates by 7.6%. Over the next 12 months, Wall Street expects Northrop Grumman to grow its earnings. Analysts are projecting its EPS of $15.32 in the last year to climb by 68.7% to $25.84.
Key Takeaways from Northrop Grumman's Q2 Results We enjoyed seeing Northrop Grumman exceed analysts' revenue and EPS expectations this quarter. We were also glad it slightly upgraded its full-year revenue and EPS guidance. Overall, this quarter seemed fairly positive and shareholders should feel optimistic. The stock traded up 1.1% to $447.28 immediately following the results.
