Northrop Grumman's record $109.6 billion backlog provides reliable mid-single-digit sales visibility, but $2.5 billion in B-21 facilitation capex and fixed-price contract risks constrain free cash flow conversion. At 18.0 times 2027 earnings, valuation fairly balances demand against execution risks.
Key points
- $109.6 billion in record backlog provides robust revenue visibility, supporting 6% sales growth in 2027.
- $3.50 billion in 2027 adjusted free cash flow yields 4.6%, funding internal capital expansion and dividend growth.
- 18.0 times forward earnings balances steady defense spending against ongoing fixed-price execution risks on B-21.
The call
At $531.55, the market requires 16.7 times forward earnings and a 4.6% free cash flow yield. This pricing assumes steady 6% revenue growth, modest margin gains, and no further contract loss provisions on fixed-price lots. The market is about right, accurately reflecting strong contract demand against multi-year capital requirements.
Revenue and adjusted free cash flow trajectory ($ billions)- Sales ($B)
- Adjusted FCF ($B)
Source: SEC filings (FY23-FY25), company guidance and estimates (FY26E-FY27E)
We forecast 2027 sales of $46.6 billion and earnings of $31.75 per share, in line with company outlooks. With defense funding facing continuing resolutions and $2.5 billion in B-21 capacity spending constraining cash returns, shares should track the broader market. We initiate coverage with a Hold rating and a $572.00 target.
Valuation
| Valuation driver | 2026E | 2027E | Method / Multiple | Implied price |
|---|
| Revenue | $44.00B | $46.64B | 6.0% growth | , |
| Segment margin | 11.34% | 11.49% | +15 bps expansion | , |
| Diluted EPS | $29.55 | $31.75 | 18.0x target P/E | $572.00 |
| Free cash flow | $3.30B | $3.50B | 23.0x target P/FCF | $570.00 |
| 12-month target | , | , | Forward P/E | $572.00 |
We apply an 18.0 times multiple to 2027 estimated earnings per share of $31.75, matching historical trading norms. The resulting $572.00 target represents 7.6% upside. Record bookings limit downside, but heavy capital commitments prevent multiple expansion.
Risks
- Additional loss provisions on early B-21 bomber production lots, signaled by quarterly negative contract margin adjustments in Aeronautics Systems.
- Extended federal continuing resolutions or defense spending caps, visible through delayed DoD contract obligation notices.
- Execution bottlenecks on the restructured Sentinel program, monitored through Defense Systems margin erosion.
What would change my mind
A binding DoD contract adjustment eliminating manufacturer cost risk on future B-21 production lots would turn us constructive.