Should You Pick Northrop Grumman Over Lockheed Martin?

We believe that Northrop Grumman stock (NYSE:NOC) is currently a better pick than its industry peer – Lockheed Martin stock (NYSE: LMT), given its better valuation and robust prospects. NOC stock trades at a slightly higher multiple of 1.9x trailing revenues, versus 1.7x for LMT. Although Northrop Grumman has seen a slightly better revenue growth lately, Lockheed Martin is more profitable. There is more to the comparison, and in the sections below, we discuss why we think NOC will outperform LMT in the next three years. In this analysis, we compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. NOC Stock Has Fared Better In The Last Three Years

LMT stock has shown gains of 55% from levels of $355 in early January 2021 to around $555 now, vs. an increase of about 65% for NOC from levels of $305 to around $505. This compares with about 50% gains for the S&P 500 over this period. However, the increase in these stocks has been far from consistent. Returns for LMT stock were 0% in 2021, 37% in 2022, and -7% in 2023, while that for NOC stock were 27%, 41%, and -14%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that LMT underperformed the S&P in 2021 and 2023 and NOC underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including CAT and HON, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. Northrop Grumman Has Seen Better Revenue Growth

Lockheed Martin has seen its revenue rise at an average annual rate of 1.1% from $65.4 billion in 2020 to $67.6 billion in 2023. On the other hand, Northrop Grumman has seen its sales rise at an average annual rate of 2.3% from $36.8 billion to $39.3 billion over the same period.

Lockheed Martin’s revenue growth over the recent years has been led by higher production volume for its Sikorsky helicopter programs, AC-3, Long Range Anti-Ship Missile (LRASM), and the Joint Air-to-Surface Standoff Missile (JASSM) program, among others. The company is seeing a higher volume of production contracts for F-35 and the national security space program driving its sales growth, a trend expected to continue in the near term. With ongoing geopolitical tensions in Russia-Ukraine and Israel-Hamas, the defense spending for some countries will remain elevated, boding well for Lockheed Martin.

Northrop Grumman’s revenue growth has been led by its space segment, driven by higher strategic missile sales. Notably, the company’s order backlog has risen to $83 billion currently, driven by growing demand for space systems. The company is seeing higher volume from Ground Based Strategic Deterrent (GBSD), the Next-Generation Overhead Persistent Infrared Polar (NextGen Polar), and the Next Generation Interceptor (NGI) programs. Its Aeronautics and Defense segments have also seen steady growth lately. For the six-month period ending June 2024, Northrop Grumman’s sales growth of 8% y-o-y was driven by the Aeronautics segment, up 16% y-o-y, driven by increased production of F-35 aircraft. Northrop Grumman produces the aircraft’s center fuselage, radar, and communications subsystems, among others.

3. Lockheed Martin Is More Profitable 

Lockheed Martin’s operating margin of 12.6% in 2023 has seen a slight decline from 13.2% in 2020, while Northrop Grumman’s operating margin contracted from 11% to 6.5% over this period.

Looking at financial risk, both companies are comparable. Lockheed Martin’s 15% debt as a percentage of equity is lower than 24% for Northrop Grumman. However, the latter’s 7% cash as a percentage of assets is higher than 5% for Lockheed Martin, implying that Lockheed Martin has a better debt position and Northrop Grumman has more cash cushion.

4. The Net of It All

We see that Northrop Grumman has demonstrated better revenue growth and has more cash cushion. On the other hand, Lockheed Martin is more profitable and has a better debt position. Now, looking at the prospects, we believe NOC is the better choice of the two. At levels of $510, NOC stock is trading at 1.8x revenues, aligning with the stock’s average P/S ratio over the last three years. In comparison, at levels of $560 per share, LMT stock is trading at 1.9x revenues, compared to the stock’s average P/S ratio of 1.6x over the last three years.

Given the uncertain geopolitical environment, the defense stocks have been in focus lately, and a slight rise in valuation multiples seems justified. While investors have already assigned a higher multiple for LMT, compared to its historical average, NOC appears to have some room for growth.

While NOC may outperform LMT in the next three years, it is helpful to see how Lockheed Martin’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 8/22/2024
[2] Cumulative total returns since the end of 2016

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