By Sam Boughedda
Northrop Grumman (NYSE:NOC) was downgraded to Neutral from Overweight, with its price target set at $490 per share at JPMorgan on Friday.
Analysts told investors in a note that they "still love the NOC story," and just because Northrop's positive attributes are widely appreciated does not make them less appealing, but the company is valued at a premium.
"B-21 and GBSD are the franchise programs of this decade and should contribute to years of growth with sustainment further out. NOC is also a leader in Space, a top DoD priority, with a good mix of exquisite programs (e.g. OPIR) and LEO efforts (e.g. Tracking Layer). Strategically, we think Northrop has a strong sense of what it is and where it's going, while on capital deployment, investors appreciate NOC's predictable cash return, even if buying stock back right now is less compelling," wrote the analysts.
However, the analysts added that while valuation may not matter for long periods, Northrop's "pronounced premium to both the group and its history on most metrics stood out to them in preparing for third-quarter earnings."
"With the story outlined above, some of this is deserved, but it appears many premium attributes of Northrop are reflected in NOC. The stock now trades around an all-time high 16.5x forward EBITDA vs. 11.2x for LMT and 12.9x for LHX," added the analysts.
"EV/Sales tells a similar story with NOC trading, near the 10-Y high and 0.6x higher than LMT (See Figure 3). (LHX is higher reflecting its better margins.) NOC trades well above LHX and LMT on pension-adj EPS and its FCF sub 4% FCF yield on 2023 is exceptionally low for Defense."