• Wondering whether Northrop Grumman is fairly priced or offering value right now, especially after a strong multi year run? This article breaks down what the current share price might be implying.
• The stock closed at US$572.41, with returns of 19.5% over 1 year, 35.6% over 3 years and 66.4% over 5 years. This sits against more recent moves of a 2.9% decline over 7 days, a 14.8% decline over 30 days and a 2.3% decline year to date.
• Recent price moves sit against an ongoing flow of sector wide headlines around defense spending priorities, contract pipelines and longer term government budgets, which can shape expectations for companies like Northrop Grumman. Broader market discussions about interest rates, inflation and geopolitical risk also tend to feed into how investors think about valuation and risk in large defense names.
• Northrop Grumman currently has a valuation score of 4 out of 6, and the sections that follow will walk through standard valuation approaches before finishing with a different way to think about what the current price may be offering.

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

A Discounted Cash Flow, or DCF, model takes estimates of the cash a company may generate in the future and discounts those amounts back to today, giving an estimate of what the business could be worth in total right now.

For Northrop Grumman, the latest trailing twelve month Free Cash Flow is about $2.99b. Analysts and model estimates project Free Cash Flow reaching about $3.90b by 2030, with a 2 Stage Free Cash Flow to Equity approach used to extend the cash flow path out to 10 years. Early years are based on analyst inputs, and later years use extrapolations from Simply Wall St to keep the projections consistent.

Running those cash flows through the model produces an estimated intrinsic value of about $498.08 per share. Compared to the recent share price of $572.41, the DCF output implies Northrop Grumman is around 14.9% overvalued on this basis.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Northrop Grumman may be overvalued by 14.9%. Discover 53 high quality undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Northrop Grumman Price vs Earnings

For a profitable company, the P/E ratio is a straightforward way to check what you are paying for each dollar of earnings. It ties the share price directly to the bottom line, which is usually the primary driver of long term shareholder returns.

What counts as a “normal” P/E depends on how the market weighs growth potential and risk. Higher expected growth or lower perceived risk can align with a higher P/E, while slower growth or higher risk usually aligns with a lower one.

Northrop Grumman currently trades on a P/E of about 17.77x. This sits below the Aerospace & Defense industry average of about 35.54x and also below the broader peer group average of about 36.65x. Simply Wall St’s proprietary Fair Ratio for Northrop Grumman is 25.50x, which is designed to reflect what a more tailored P/E might look like after factoring in elements such as earnings, profit margins, industry, market capitalisation and company specific risks.

Because the Fair Ratio adjusts for these company characteristics, it can be more informative than a simple comparison with peers or the industry. With the current P/E of 17.77x sitting below the Fair Ratio of 25.50x, the multiple based view indicates that the shares may be undervalued on this metric.

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 are introduced here as simple story based frameworks on Simply Wall St’s Community page. They let you connect your view of Northrop Grumman’s future revenue, earnings and margins to a forecast and a fair value. You can then compare that fair value with today’s price to help inform when you might buy or sell, and have that view update automatically when fresh news or earnings arrive. One investor might build a bullish Northrop Grumman Narrative that lines up with the US$815.00 upper analyst price target, while another might lean on a more cautious story that anchors closer to the US$587.22 lower target, with both perspectives clearly tied back to the numbers behind them.

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.