The defense industry is experiencing one of the strongest demand cycles in recent times. Despite that, Northrop Grumman Corporation (NYSE:NOC)’s shares are down over 11% for the year, as of October 15, which has pushed the stock’s valuation below its own historical multiples and the sector median.
This raises the question about whether the market is punishing a weakness in the business or the stock’s recent lumpiness.
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Industry Trends
Ongoing geopolitical conflicts support the sector as global military expenditure rises and NATO member nations commit to spending an increased percentage of their GDP on defense.
Northrop Grumman Corporation remains an important player, especially with its B-21 Raider, tactical missiles, Sentinel ICBM, and other critical programs. It continues to receive high-value contracts, such as the $4.8 billion Army contract secured last month.
That said, increasing production levels and rising cost of materials could pressure profits, especially on fixed-price programs.
The stock has been sliding this year due to margin pressures, contract losses, and uncertainty around future U.S. defense spending.
Recent Financial Results
The defense contractor reported sales of $10.88 billion for the second quarter, up 10% sequentially, 5% year-over-year, and above analyst estimates of $10.81 billion.
Earnings per share of $7.68 also beat Wall Street’s forecast, but were down from $8.15 a year earlier, when the company received a $1.04 benefit from the divestiture of its training services business.
Following the results, NOC lifted its guidance for sales and adjusted profit for the full year. Sales are now expected between $43.75 billion and $44.25 billion, representing an increase of $250 million, while adjusted EPS is anticipated in the range of $28.60 to $29.10, up by $1.20 from the previous forecast.
However, some analysts have attributed the earnings beat in Q2 to a lower tax rate.
Operating margin was another major weak point, which dropped from 13.8% in the prior year’s period to 10.1%. Reasons include the divestiture benefit from last year not repeating and a $91 million unfavorable charge on the GEM 63XL program during the quarter.
Adjusted free cash flow grew 54% year-over-year despite a 31% increase in capital expenditure. The company plans on spending 4.5% of sales on capital expenditure in 2027 and 2028 as it ramps up B-21 production, which could impact future free cash flow growth.
Valuation: Cheap for a Reason, or a Bargain?
Northrop Grumman Corporation has a trailing P/E ratio of 16.35 and a forward P/E ratio of 17.04. The gap suggests that analysts expect 12-month earnings to be around 4% below the trailing EPS. This is likely due to pressure on near-term margins, but management is confident about an improvement starting the second half of the year.
Both multiples are well below benchmarks. The stock’s own 5Y average for trailing P/E is 19.61, while for forward P/E, it is 19.69, meaning that NOC trades at approximately 17% and 13% below its own history.
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The sector median is 21.21 for trailing P/E and 18.97 for forward P/E, representing a discount of 23% and 10% respectively. The gap reduces on the forward basis, and that is because the sector’s forward P/E is lower than the trailing P/E, which means analysts anticipate growth in earnings for peers, while NOC’s valuation hints at a decline.
Having said that, there is still a strong case to invest in the company. Backlog continues to grow and reached a record $105 billion at the end of Q2. Moreover, the management has lifted outlook for the rest of the year, and there is significant growth in cash generation, which shows the fundamentals are strong.
A sustained recovery in margins during the second half of 2026 could push earnings estimates higher. If the stock price remains unchanged, that would lower NOC’s forward P/E and make the shares look even cheaper. If investors also regain confidence in the durability of the margin recovery, the stock could eventually command a higher multiple closer to its historical 19–20x range.
On the contrary, some investors may view the discount as a warning, instead of an opportunity. Repeated charges on defense programs remain a challenge. If margins continue to decline, analysts may revise EPS estimates downwards, which at today’s price will push the forward P/E upwards, making the stock look less of a bargain than it does currently.
Investment Thesis
Northrop Grumman Corporation offers a favorable risk/reward scenario for patient investors, given that it trades at a discount to both the sector and its own historical valuation, has a record backlog, and raised guidance during the recent quarter. It presents an attractive buying opportunity for investors with a 2-3 year horizon.
However, it does not suit investors who are looking for earnings growth in the near term or cannot brave volatility from another program charge.
Investors looking for proof of margin recovery before buying NOC’s shares should wait for the company’s third-quarter results, which will be announced on October 20, 2026.
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