• If you are wondering whether Northrop Grumman at around US$552.27 is offering fair value today, it helps to break the story into recent returns, current sentiment and what the numbers say about price versus fundamentals.
• The stock has had a mixed run, with a 4.7% decline over the last week and a 20.0% decline over the last month, yet it still shows a 15.9% return over 1 year, 33.2% over 3 years and 61.8% over 5 years.
• Recent coverage of the defense sector has focused on ongoing geopolitical tensions and continued emphasis on defense capabilities, which keeps attention on companies like Northrop Grumman. Investors often look at this kind of backdrop alongside multi year returns to reassess whether the latest share price pullback reflects changing risk perceptions or a potential entry point.
• On Simply Wall St's valuation framework, Northrop Grumman currently scores 4 out of 6 on its valuation checks. The rest of this article will walk through the main valuation approaches used to reach that score, and then finish with a broader way to think about what valuation really means for you as a shareholder.

Approach 1: Northrop Grumman Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model takes estimates of a company’s future cash flows and discounts them back to today, aiming to work out what those future dollars are worth in present terms.

For Northrop Grumman, the latest twelve month Free Cash Flow is about US$2.99b. Using a 2 Stage Free Cash Flow to Equity model, analysts and extrapolated estimates project Free Cash Flow reaching around US$3.90b by 2030. The ten year path from 2026 to 2035 is based on analyst inputs for the nearer years, then Simply Wall St extrapolations for the later years, all expressed in US$ and discounted back to today.

Pulling these cash flows together, the model arrives at an estimated intrinsic value of about US$480.19 per share. Compared with the current share price of roughly US$552.27, the DCF output points to the stock trading about 15.0% above this estimate, so the model indicates it is overvalued on these assumptions.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Northrop Grumman may be overvalued by 15.0%. Discover 51 high quality undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Northrop Grumman Price vs Earnings

For profitable companies like Northrop Grumman, the P/E ratio is a common way for investors to think about what they are paying for each dollar of earnings. A higher or lower P/E often reflects what the market is currently willing to pay for those earnings, given expectations and perceived risks.

In general, faster expected earnings growth and lower perceived risk can support a higher “normal” P/E, while slower growth and higher risk tend to line up with a lower “normal” P/E. Northrop Grumman currently trades on a P/E of about 17.14x, compared with an Aerospace & Defense industry average of roughly 36.92x and a peer group average of about 35.34x.

Simply Wall St’s Fair Ratio for Northrop Grumman is 28.28x. This Fair Ratio is a proprietary estimate of what a reasonable P/E might be for the stock, after factoring in its earnings growth profile, profit margins, industry, market value and risk characteristics. It is therefore more tailored than a simple comparison with peers or the broad industry, which may not share the same mix of growth prospects, business risks or profitability. Since the current P/E of 17.14x is materially below the Fair Ratio of 28.28x, the multiple comparison points to the stock being undervalued on this basis.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Northrop Grumman Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St give you a clear story behind the numbers by linking your view of Northrop Grumman’s business, your assumptions for revenue, earnings and margins, and your preferred fair value into one forecast. This forecast sits on the Community page, updates automatically when new earnings or news arrive, and helps you compare that Fair Value to the current price when considering your investment approach, whether you lean toward a more optimistic view closer to US$815 or a more cautious view nearer to US$587.22 based on the analyst range provided.

Do you think there's more to the story for Northrop Grumman? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.