Northrop Grumman Is a Space Company Now, and That's Good News for Investors

Company Overview - Northrop Grumman transformed from an aerospace-focused company to a balanced aerospace and space systems company after acquiring Orbital ATK seven years ago [1] - The company's space division has become increasingly profitable, contributing to overall profitability despite initial setbacks with the OmegA rocket program [2] Financial Performance - Q3 sales grew 2% YoY to $10 billion, with EPS increasing 13% to $7 [3] - Space division revenues declined 3% but operating profits rose 14% YoY, the highest among all divisions [3] - Space division operating profit margins reached 12%, making it the second most profitable business after mission systems (13.8%) [4] - Aeronautics profit margins were 10.4%, while defense systems had 9.4% margins [4] Orders and Future Growth - The company secured $11.7 billion in new orders during Q3, resulting in a book-to-bill ratio of 1.2 [5] - Most new orders came from mission systems, space, and aerospace divisions, which are the company's most profitable businesses [5] - Management raised guidance for 2024, anticipating sales exceeding $41 billion and operating profits over $4.5 billion [6][7] Valuation Metrics - The stock has a price-to-sales ratio of 1.8 and an enterprise value-to-sales ratio of 2.2, both above historical averages [6] - The P/E ratio is approximately 20x based on anticipated EPS of $25.65 [7] - Free cash flow is expected to grow over 20% to $2.5 billion, but the stock trades at nearly 30x this year's free cash flow [8] Strategic Outlook - The space division is expected to play a crucial role in Northrop's future, supported by participation in the US Space Force's PWSA missile defense system and a partnership with Firefly Space to develop new rockets [9] - Despite strong growth prospects, the stock appears richly priced based on current valuation metrics [9][10]