Key Points
Northrop Grumman beat on earnings last month, but its guidance looks weak.
At 30x free cash flow, Northrop Grumman anticipates sales growth in the low-to-mid single digits.
In a bad earnings season for defense stocks in general, Northrop Grumman (NYSE: NOC) was one of the few winners. Shares of rivals General Dynamics and Textron both dipped despite reporting earnings "beats" last month. Northrop, in contrast, beat earnings expectations and saw its stock rise. The share price jumped 2.7% on earnings day, and the stock is now up a total of 7.3% since earnings came out.
Why? Heading into Northrop's report, analysts expected the defense contractor to earn $6.96 per share in Q4 on $11.6 billion in sales. Northrop's reported $7.23 per share "adjusted" profit beat the earnings forecast, while the company's GAAP earnings of $9.99 per share crushed it. A reported $11.7 billion in quarterly sales edged out that estimate as well.
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Image source: Northrop Grumman.
Northrop Grumman Q4 and full-year earnings
Northrop Grumman grew its sales 10% year over year in Q4, versus just 2% growth (to $42 billion) for the year as a whole. Earnings per share climbed 15% for the quarter, versus just 3% for the year.
Free cash flow for the quarter climbed 84%, to $2.2 billion, and was up 27% for the year at $3.3 billion. That was still less than Northrop reported as full-year net profit, however -- $4.2 billion, or $29.08 per diluted share.
As a result, while Northrop Grumman has a 24.4x price-to-earnings ratio today, its valuation based on free cash flow is quite a bit richer: Northrop's price-to-free cash flow ratio is 30.5.
Is Northrop Grumman stock a buy?
Whether that's a fair price depends mainly on how fast Northrop is growing. Is it low single digits, as it did in 2025, the mid-teens rate it accelerated to in Q4, or something different?
This is where things might get dicey for Northrop.
Turning to guidance, Northrop forecast approximately 4% sales growth in 2026, to $43.8 billion, with adjusted earnings of about $27.65 per share. Both numbers fell short of analyst guidance, and the earnings number, in particular (although "adjusted"), appears to imply a decline in profit from the $29.08 per share, GAAP, that Northrop earned in 2025.
Free cash flow is forecast to hold steady (and remain below reported profit) at about $3.3 billion in 2026 -- which makes sense given management's note that its book-to-bill ratio was precisely 1.0 in 2025. (With new order bookings balanced against fulfilled orders billed, sales and earnings -- and free cash flow, too -- are likely to hold steady, but not grow much, this year.)
For this reason, despite management boasting of a "new company record of $95.7 billion" in backlog, I believe Northrop Grumman stock costs too much relative to the company's growth prospects. Northrop stock is a sell for me.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Textron. The Motley Fool has a disclosure policy.
