NOC vs LMT: A Valuation War Between Top Defence Manufacturers!

6 set

ABOUT COMPANIES

Northrop Grumman NOC excels in advanced aircraft systems, divided into four main areas: Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems. Aeronautics Systems designs and manufactures cutting-edge aircraft for the U.S. military and global clients. Defense Systems integrates battle management and weaponry, while Mission Systems delivers innovative solutions for defense and intelligence. Space Systems focuses on solutions for national security and commercial purposes. Established in 1939 by John K. Northrop and others, the company is headquartered in Falls Church, VA.

Lockheed Martin LMT stands as a top global security and aerospace company, dedicated to the research, design, and production of advanced technology systems. It operates in four primary segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. The Aeronautics segment focuses on military aircraft, including combat and drones. MFC specializes in air and missile defense and precision strike systems. RMS develops military and commercial helicopters and cyber solutions, while the Space segment creates satellites and defense systems. Founded in 1912, the company is located in Bethesda, MD.

MARKET CAPITALIZATION
● Northrop Grumman (NYSE: NOC) - $75.96 Billion
● Lockheed Martin (NYSE: LMT) - $135.53 Billion

TECHNICAL ASPECTS

● Northrop Grumman
➖ The monthly chart shows that the stock price is currently on a distinct upward path.
➖ Previously, it faced resistance around the $360 level, caused a notable pullback.
➖ Subsequently, the price formed a Double Bottom pattern and broke out successfully.
➖ This breakout drove the price to an all-time high near the $556 level but the price started declining from there.
➖ Nevertheless, the stock price found strong support around the $420 level, allowed it to bounce back.
➖ Currently, the stock is approaching its previous all-time high, and if it can overcome that resistance, we can anticipate further price increases in the coming days.

● Lockheed Martin
➖ This stock is on a strong upward trajectory, consistently achieving higher highs and higher lows.
➖ Following a significant breakout around the $500 mark, the stock price surged and is now trading at $568.5, just shy of its all-time peak of $578.7.
➖ From a technical perspective, the price is hovering just below the upper boundary of a parallel channel, which may act as a resistance point.
➖ However, if the price can break through this range and maintain that momentum, we could see even greater upward movement ahead.

Relative Strength

● The chart shows that the NYSE Composite NYA has provided a solid return on investment of about 18% in the last year. In comparison, Northrop Grumman and Lockheed Martin have done even better, with returns of around 20% and 27%, respectively.

REVENUE BREAKDOWN

● Northrop Grumman

The company derives its income from four main segments.
➖ The largest share comes from the space systems segment, contributing around 33%, which equates to $14.34 billion out of a total revenue of $43 billion.
➖ Next, the aeronautics systems segment adds nearly 27%, bringing in $11.61 billion of the overall revenue.
➖ The mission systems segment follows closely, accounting for about 26%, or $11.12 billion of the total.
➖ Finally, the defense systems segment generates nearly 14%, totaling $5.99 billion of the overall revenue.

● Lockheed Martin

Similar to Northrop Grumman, this company also operates through four segments to drive its revenue.
➖ The aeronautics segment leads the way, contributing around 38.4%, which amounts to nearly $28.77 billion of the total revenue of $74.85 billion.
➖ The rotary and mission systems segment accounts for 26.4% of revenue, equating to $19.76 billion.
➖ Next, the space segment contributes 17.8%, which is $13.33 billion.
➖ Finally, the missile and fire control segment makes up 17.4%, totaling $12.99 billion of the overall revenue.

REVENUE & PROFIT ANALYSIS

● Northrop Grumman

Revenue
➖ For the FY23 the revenue has jumped by 7.3% to $39.3 B from $36.6 B in FY22.
➖ In the recent June quarter there is no significant surge in revenue as the recent quarterly revenue stands at $10.2 B compared to $10.1 B in the march 2024. But from the last year June quarter the revenue has grown by almost 6% from $9.6 B.

Profit
➖ The operating profit has experienced a decline, with FY23 reporting only $2.9 billion, a drop from $6.3 billion in FY22.
➖ In the latest June quarter, the operating profit held steady at $1.3 billion, unchanged from the March quarter.

Basic EPS (LTM)
➖ The basic EPS saw a slight rise in June, climbing to $15.26 (LTM) from $14.33 (LTM) in March 2024. However, compared to the same quarter last year, there has been a significant drop from $30.23 (LTM)

Analyzing these numbers shows that although revenue has risen, the company is having difficulty producing profits, which may impact the share price in the near term.

● Lockheed Martin

Revenue
➖ In FY23, the company experienced a slight revenue increase of 2.4%, rising to $67.6 billion from $66 billion in FY22.
➖ During the recent June quarter, revenue reached $18.1 billion, up from $17.2 billion in the March quarter. Compared to the same quarter last year, this represents a significant growth of approximately 8.6%, up from $16.7 billion.

Profit
➖ The operating income has experienced a year-over-year increase. For FY23, it reached $9.0 billion, marking a 23% rise from $7.3 billion in FY22.
➖ However, there hasn't been a notable change in operating profit on a quarter-over-quarter basis. In June, the operating profit stood at $2.2 billion, slightly up from $2.1 billion in March. This figure is consistent with the operating profit reported in the same quarter last year.

Basic EPS (LTM)
➖ The basic EPS stood at $27.58 (LTM) in June 2024
➖ Over the past year, there has been no notable growth in EPS (LTM)

Lockheed Martin demonstrates a more robust financial standing compared to Northman Grumman.

VALUATION

● P/E Ratio

➖ P/E vs. Median P/E
(1) Northrop Grumman's current price-to-earnings ratio over the past twelve months stands at 33.2x, which appears elevated when compared to its four-year median of 15.2x.
(2) Lockheed Martin's recent twelve-month p/e ratio is 20.1x, also showing a rise relative to its four-year median of 16.2x.

➖ P/E vs. Industry P/E

(1) NOC shows a fair valuation with a Price-To-Earnings Ratio of 33.2x, which is just below the US Aerospace & Defense Industry average of 33.3x.
(2) On the other hand, LMT, with a P/E of 20.1x, seems to be undervalued relative to the industry average of 33.3x.

● P/B Ratio

➖ NOC's current P/B ratio of 5.3x appears inflated when stacked against the US Aerospace & Defense Industry average of 3.2x.
➖ In the case of LMT, it stands out as significantly overvalued, boasting a P/B ratio of 21.9x, which is far above the industry average of 3.2x.

FREE CASH FLOW ANALYSIS
● Northrop Grumman
➖ In FY23, cash flow from operations saw a remarkable increase, climbing to $3.9 billion, a notable rise from $2.9 billion in FY22.
➖ In the most recent quarter, this figure reached $4.4 billion, up from $3.9 billion in March.

● Lockheed Martin
➖ There was little change in operating cash flow, with FY23 reporting $7.9 billion, which is nearly the same as the $7.8 billion recorded in FY22.
➖ On a quarterly basis, there has been an uptick; for the June quarter, operating cash flow stood at $8.8 billion, an increase from $8.0 billion in March and $7.7 billion in the same quarter last year.

DEBT ANALYSIS

● NOC currently has a debt of $16.3 billion, resulting in a debt-to-equity ratio of 114%. While this may raise some concerns, the company boasts an interest coverage ratio of 5.2, indicating a solid ability to manage interest payments on its debt.
● In contrast, LMT carries a debt of $19.3 billion, leading to a debt-to-equity ratio of 311%, which suggests poor financial health. However, with an impressive interest coverage ratio of 8.9, the company is in a strong position to meet its interest obligations.

TOP SHAREHOLDERS

● Northrop Grumman

➖ State Street Global has a notable 9.59% ownership in this firm, while The Vanguard Group possesses a considerable 8.22% stake.

● Lockheed Martin

➖ In addition to the 11.2% held by Lockheed Martin's Employee Stock Ownership Plan (ESOP), State Street Global and The Vanguard Group own 15.1% and 8.99% respectively.
➖ BlackRock also maintains a significant 7.13% interest in this company.

CONCLUSION
After reviewing all the financial metrics, it becomes evident that each company possesses distinct strengths and weaknesses. It's difficult to determine which one is the superior investment choice at this moment. A look at the monthly chart indicates that both companies are currently at a high point, but they could be good candidates for accumulation during any significant downturns.

In 2023, the US spent $916 billion on defense, which was more than any other country. This was an increase of $55 billion from 2022. and this figure could increase given the current global landscape. Therefore, companies like Northrop Grumman and Lockheed Martin are expected to perform well in the foreseeable future.