Northrop Grumman’s (NOC) stock dropped 15% after a disappointing Q1 earnings report, its worst single-day loss since 2008.

Revenue fell 7% year-over-year and net income was cut in half, driven in part by a $477 million charge on the B-21 bomber program.

The company’s Space Systems segment saw an 18% revenue drop, and overall performance failed to meet high market expectations.

While the company still holds a $93 billion backlog, investor hopes for a return to pre-2020 profitability may be overly optimistic.

Given the earnings miss, program execution challenges, and valuation concerns, the stock remains under pressure.

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Defense contractors have long been seen as the backbone of national security and resilient investments in turbulent times.

With escalating global tensions, governments are funneling billions into advanced weaponry, space exploration, and cutting-edge defense technologies.

But even the most formidable companies in the industry are not immune to pressure.

Northrop Grumman (NOC) shocked the markets this week with a stunning 15% decline in its stock price, marking its worst single-day loss since 2008.

This plunge followed a disappointing Q1 earnings report where revenue fell 7% year-over-year to $9.5 billion, a miss of $480 million.

Net income halved to $481 million, down from $944 million a year ago, while the company also lowered its full-year earnings forecast.

The challenges didn’t end there. Northrop recorded a $477 million charge tied to its B-21 bomber program, primarily due to inflationary pressures.

The company’s recent struggles highlight significant headwinds, especially in its Space Systems segment.

This division, once a major driver of growth, saw an 18% decline in revenue, attributed to reduced work on classified programs and contract modifications.

Other segments like Aeronautics and Defense Systems showed mixed results, failing to offset the downturn in Space Systems.

At the same time, Northrop’s backlog remains substantial at $93 billion, providing a buffer against short-term revenue fluctuations.

However, this backlog alone may not justify the high market expectations embedded in the stock price.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform return on assets ”ROA” to improve to 17% from 13% last year.

If we look at the EEA, we can see that investors are expecting returns to climb to 17% in the coming years, levels that this business hasn’t achieved since 2019.

Given the latest earnings disappointment, those expectations may need to be dialed back.

Tariffs and trade policies also linger in the background, but management downplayed their potential impact, stating that most costs tied to trade are already baked into government contracts.

Still, with geopolitical tensions and shifting defense priorities, especially in Europe, there’s a growing risk that the company could lose some international business to local suppliers.

For now, Northrop remains a dominant player in aerospace and defense, but the road ahead looks more uncertain.

Between cost pressures, flat growth, and a valuation that still looks stretched, the stock may continue to face pressure unless it delivers a turnaround in earnings quality and program execution.

Until then, the company still looks overvalued.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research