2021 was a record year for orbital rocket and satellite launches, and this year is expected to set another milestone in both categories, observes Mike Cintolo, growth stock expert and editor of Cabot Top Ten Trader.
Meanwhile, the U.S. government is calling for a renewed push into space exploration — factors that are providing fresh prospects for aerospace contractors like Northrop Grumman (NOC).
The company is well known as an international defense technology firm with a leading position in autonomous systems (i.e. unmanned aircraft such as drones), but space tech is where much of its recent revenue opportunities have come from.
Northrop recently noted that while the Pentagon’s budget has increased by around 5%, NASA’s proposed 2023 budget is up nearly twice that amount. The company just secured a $2 billion contract from the United Launch Alliance to supply GEM 63 solid rocket boosters to propel Amazon’s Project Kuiper satellites (for providing broadband internet) into space.
Consequently, Northrop sees space segment sales of over $11 billion this year, and analysts predict that space could account for a third of Northrup’s operating profit in 2022, which would make it the firm’s new revenue leader.
Northrup’s defense business, meanwhile, is heating up as the firm just won a $338 million Navy contract to research alternatives and new capabilities for H-1 avionics and weapons, while the U.S. Defense Department recently awarded the firm a contract to continue developing missiles to intercept hypersonic weapons (some of which have been seen in the Russian war).
Of course, this isn’t a great growth situation — in Q1, revenue of nearly $9 billion was down 4% from a year ago but up 2% sequentially, while EPS of $6.10 was down 7%. But there’s surety here (Northrop reported a $76 billion backlog that’s over two times annual sales), the valuation is reasonable (21 times earnings; 1.4% yield) and analysts see earnings picking up steam going forward.
Technically, NOC’s bull market over the last 18 months has occurred in two stages. The first stage began in early 2021 when shares rocketed from $300 at the start of the year to just over $400 in late October. A sharp pullback to $345 followed at the end of the year, then came the second stage when NOC catapulted to $493 (up over 40%) earlier this year.
Nearly four months of backing and filling have followed that peak, though resistance has been tough to crack; the recent sharp drop came after the $490 area again brought in sellers. We’ll set our buy range up from here, thinking a quick push back toward the recent highs would be meaningful.