Northrop Grumman
Long-cycle government cost-plus and fixed-price prime contracting: multi-year DoD/NASA programs (development + production + sustainment), backlog-driven revenue recognized over time on percentage-of-completion; ~85%+ of sales to the US government.
The thesis on this name
State of Space & Launch
A dominant Space Systems franchise spanning satellite constellations, solid rocket motors (a duopoly with Aerojet/LHX), and missile-warning/tracking — selected by the Space Force on June 1, 2026 to demonstrate space-based interceptors for Golden Dome, the program's marquee orbital-layer work. Space Systems has been a growth segment within a broadly growing backlog driven by munitions, radars, and space (Q1 2026). It is the lowest-beta way to own the militarization-of-LEO thesis with prime cash generation and capital return, and its solid-propulsion position is a genuine bottleneck the whole launch/missile chain depends on.
Earnings, margins, COGS & capex
NOC is a ~$42B-revenue defense prime growing low-single-digits with a record $95.7B backlog (1.10 book-to-bill, FY25). FY25 was depressed by a B-21 fixed-price loss provision that crushed Aeronautics margin; Q1 FY26 EPS surged +85% to $6.14 as that base normalized and pension income rose. Space Systems — the franchise of interest — fell ~8% in FY25 to $10.8B on the NGI wind-down and SDA program transitions, but is guided to rebound to ~$11B in FY26, with Golden Dome space-based interceptors a new multi-year catalyst.
Income statement — where each revenue dollar goes
% of revenueOf every $1 of revenue, ~98¢ is cost of goods and ~0¢ operating expense, leaving ~2¢ of operating profit.
Revenue trend
Margins
flat→down (pension/MTM noise)
up (B-21 base normalizing)
down ($71M GEM 63XL charge)
up (FCF +26% YoY)
COGS structure
COGS is dominated by direct program costs on long-cycle contracts: skilled/cleared labor, materials & propellants (ammonium perchlorate, carbon fiber, microelectronics), and sub-tier subcontract content. On fixed-price development lots (B-21 LRIP, Sentinel) inflation and overruns flow straight to COGS as loss provisions; cost-plus programs pass costs through. Pension/retirement accounting and MTM adjustments swing reported margins.
Capex
Capex runs ~$1.4–1.5B/yr (est.; $167M in seasonally-light Q1 FY26) — funds solid-rocket-motor capacity expansion (13k→25k motors/yr by 2029), satellite/space-vehicle production lines, B-21 and Sentinel facilities, and classified-program infrastructure.
Latest earnings
Beat on the headline, weak underneath. Diluted EPS $7.68 vs a ~$6.82 consensus (+12.6%); sales $10,876M vs ~$10.8B expected. But EPS FELL 6% YoY and the beat leans on tax, not operations: the effective tax rate was 6.3% vs 17.7% PY on remeasurement of uncertain tax positions with the IRS. Total operating income fell 23% (PY included a $231M divestiture gain), segment margin fell 120bps, and the quarter absorbed a $91M unfavorable EAC on GEM 63XL (Space) and a $68M unfavorable EAC on SiAW (Defense). Shares closed -2.2% at $512.29 on print day, then recovered to $542.48 by Jul 31.
Raised, as of 7/21/2026. FY26 sales $43,750-44,250M (from $43,500-44,000M, +$250M); MTM-adjusted EPS $28.60-29.10 (from $27.40-27.90, +$1.20). Segment operating income $4,850-5,000M and adjusted FCF $3,100-3,500M both reaffirmed. Segment guide: Aeronautics ~$14B at mid-to-high 9% (from mid-$13B / low-to-mid 9%); Defense mid-to-high $8B at ~10%; Mission high-$12B at ~15% (from high 14%); Space Systems ~$11B with the margin rate CUT to 'low 10%' from '~11%'. Capex $1.85B for 2026, ~4.5% of sales in 2027-28. Guidance explicitly excludes any impact from a prolonged government shutdown or spending cuts.
- Total backlog
- $104,692M at Jun 30 2026 (record), +9% vs $95,681M at Dec 31 2025
- Q2 net awards / book-to-bill
- $20.0B; 1.84x on $10,876M of Q2 sales (computed). Incl. $7.6B Sentinel, $4.3B restricted, $1.0B F-35, $0.8B GPI, $0.7B MESA
- Segment operating margin
- 10.6% Q2 2026, down 120bps from 11.8%
- Space Systems
- Sales $2,753M (+4%); margin 8.6% vs 10.6% on a $91M GEM 63XL EAC; backlog $26,981M, +3% YTD; FY margin guide cut to low 10%
- Defense Systems
- Sales $2,093M (+5%, +7% organic); margin 7.5% vs 12.7% on a $68M SiAW EAC; backlog $34,678M, +25% YTD on Sentinel
- Effective tax rate
- 6.3% Q2 2026 vs 17.7% PY - the primary driver of the EPS beat
- Diluted EPS
- $7.68 Q2 (-6% YoY); $13.83 1H (+21% YoY, off a B-21-loss-provision base)
- Adjusted free cash flow
- $978M Q2 (+54%); -$845M 1H vs a reaffirmed $3.1-3.5B FY26 guide
Growth drivers
- Golden Dome / space-based interceptors (demo selected Jun 1 2026 — on-orbit target 2027) — potential multi-year, multi-billion architecture.
- B-21 Raider production ramp toward 100+ aircraft, with margins normalizing off the FY25 loss-provision base.
- SDA Transport/Tracking layer satellites (150-satellite commitment) + missile-warning growth.
- Solid-rocket-motor + munitions volume surge (toward ~25k motors/yr by 2029).
- Sentinel ICBM modernization program (restructured, first flight ~2027).
- Rising US + allied defense budgets (~$1.2T US defense bill).
Reported financials — SEC EDGAR
Audited GAAP figures pulled from SEC filings · latest filing 2026-01-27. The audited primary-source spine — not financial advice.
Revenue — annual (GAAP)
Margins & balance sheet — FY’25
Bull & bear
Demand has never been better documented: $20.0B of Q2 awards took backlog to a record $104,692M at a 1.84x book-to-bill, Sentinel alone booked $7.6B, and management raised both sales and EPS guidance. Aeronautics is executing through the B-21 ramp at a restored 10.3% margin and Mission Systems is compounding margin, so the two largest sectors are working while Golden Dome starts converting from narrative into contract. At ~17-19x earnings versus a $643.62 mean sell-side target, the price does not embed that book of business.
- Record backlog: $104,692M at Jun 30 2026, +9% from Dec 31 2025, on $20.0B of Q2 net awards - a 1.84x book-to-bill, led by $7.6B for Sentinel and $4.3B of restricted programs (fact, Q2 release).
- Guidance raised on both lines that matter: FY26 sales to $43,750-44,250M (+$250M) and MTM-adjusted EPS to $28.60-29.10 (+$1.20) (fact).
- Aeronautics is past the B-21 loss-provision trough: Q2 sales +13% to $3,519M on B-21, TACAMO, B-2/F-35/E-2, margin held at 10.3%, and 1H margin of 9.8% versus 2.3% a year ago; FY sales guide raised to ~$14B (fact).
- Mission Systems is the margin engine: sales +3% to $3,250M with margin up 140bps to 15.4% on favourable EAC adjustments, and the FY guide raised to ~15% from high 14% (fact).
- Golden Dome is starting to convert: management said reconciliation funds are 'being put onto contract,' $0.8B of Q2 awards went to Glide Phase Interceptor, and more selection decisions are expected through 2026 into early 2027 (company, Q2 call - program sizing remains unquantified).
- Valuation: 17.22x trailing and 18.57x forward P/E at the $542.48 Jul 31 2026 close, against a $643.62 mean target across 23 covering firms (fact, market data).
Strip out the tax line and this was a weak quarter: operating income fell 23%, EPS fell 6%, segment margin fell 120bps, and two more fixed-price/development programs took charges. The segment the growth thesis rests on - Space - had its full-year margin guide cut, grew backlog only 3% year-to-date, and absorbed the largest of the charges. Meanwhile capex is stepping to $1.85B this year and ~4.5% of sales thereafter, and the entire reaffirmed $3.1-3.5B FCF guide now has to land in the back half against a -$845M first half.
- The beat was tax, not operations: a 6.3% effective tax rate versus 17.7% PY (remeasurement of uncertain tax positions) carried it, while total operating income fell 23% to $1,096M and diluted EPS fell 6% YoY to $7.68 (fact).
- Fixed-price and development execution keeps producing charges: a $91M unfavorable EAC on GEM 63XL and a $68M unfavorable EAC on SiAW this quarter alone, taking Defense margin to 7.5% from 12.7% and Space to 8.6% from 10.6% (fact).
- Space Systems - the franchise the thesis rests on - had its FY26 margin guide CUT to 'low 10%' from '~11%', ran 9.0% margin in 1H versus 10.8% PY, and grew backlog just 3% year-to-date to $26,981M, the second-weakest of the four sectors (fact).
- Capex is stepping up structurally: $1.85B guided for 2026 (Q2 capex +31% YoY to $302M) and ~4.5% of sales in 2027-2028 for the B-21 ramp - a lasting drag on FCF conversion at a company already carrying ~$12.9B of net debt (fact/company).
- The FCF guide is a back-half cliff: 1H adjusted FCF of -$845M against a reaffirmed $3,100-3,500M full-year range means ~$4.0-4.3B has to arrive in 2H (fact, computed from the release).
- Single-customer and budget risk is unchanged and explicitly carved out: the company states its guidance does not reflect a prolonged government shutdown or the application of spending limits or other spending cuts (fact, Q2 release).
What it is worth
Forward P/E + EV/EBITDA relative to defense-prime peers, cross-checked against sell-side targets; sum-of-parts upside from a Golden Dome/Space re-rating.
~$480–520 (de-rate to ~17-18x on B-21/Sentinel overruns + Space stagnation)
~$700–750 (median sell-side ~$750
~25-27x FY26 MTM-EPS)
~$800+ (re-rate to ~28x on FY26 EPS + funded Golden Dome SBI production)
At ~$542 NOC trades ~19.5x FY26 MTM-EPS guide midpoint ($27.65) and ~15x NTM EV/EBITDA — below RTX (~25x P/E), above cheap LMT (~17x); a Golden Dome production win is the key upside option not in the base.
SWOT
Strengths
- Record $95.7B backlog (1.10 book-to-bill, FY25) gives multi-year revenue visibility (fact, 10-K).
- Sole-source/duopoly franchises — B-21 stealth bomber, Sentinel ICBM (sole-source after Boeing exit), and ~50% of the US solid-rocket-motor duopoly with L3Harris/Aerojet (fact).
- Space Systems breadth — SDA Transport/Tracking layers (150-satellite commitment), missile-warning, and now a Golden Dome space-based-interceptor demo selection (Jun 1 2026, fact).
- Strong cash generation: $3.3B FY25 FCF (+26% YoY); 22 consecutive years of dividend increases (fact).
Weaknesses
- B-21 is firm-fixed-price for early lots — inflation/cost overruns hit NOC, not the customer (FY25 loss provision, fact).
- Sentinel ICBM has had a Nunn-McCurdy 'critical' cost breach — restructured but a chronic overrun/schedule risk (fact).
- Space Systems revenue declined ~8% in FY25 ($10.8B) on NGI wind-down + SDA transitions — segment is lumpy and program-transition-sensitive (fact).
- Heavy single-customer concentration — ~85%+ of sales to the US government — exposed to budget caps, CRs, and shutdowns (fact).
- Q1 FY26 Space margin fell to 9.5% on a $71M GEM 63XL launch-anomaly charge — fixed-price hardware execution risk (fact).
Opportunities
- Golden Dome: a potential multi-hundred-billion-dollar missile-defense architecture; NOC won a space-based-interceptor demo (Apex bus partner), on-orbit target 2027 (fact/est. on sizing).
- Sustained record defense budgets — Senate advancing a ~$1.2T defense bill (mid-2026); missile defense + space are priority growth lines (fact).
- Solid-rocket-motor scaling — NOC delivered ~13,000 motors in 2024, targeting ~25,000/yr by 2029 as munitions demand surges (fact).
- B-21 production ramp to a USAF fleet of 100+ aircraft as it transitions from loss-making LRIP to profitable full-rate production (est.).
- International demand (Europe/Indo-Pacific rearmament) for munitions, IBCS, and sensors (est.).
Threats
- SpaceX/Starshield vertically integrating into satellite manufacturing + gov services, plus new entrants (Apex, Anduril, Ursa Major, X-Bow) eroding the SRM duopoly (fact).
- US fiscal pressure / debt-ceiling + continuing-resolution risk could delay or cap program funding (est.).
- Fixed-price contracting structure transfers cost-overrun risk to NOC on flagship programs (B-21, Sentinel) (fact).
- Golden Dome is a 12-firm competitive field for SBI — selection ≠ production award; could be descoped or re-competed (fact).
- Program cancellation/restructuring (e.g., NGI wind-down already cost Space ~$98M of Q1 sales) (fact).
Moats, dependencies & bottlenecks
Moats
multi-decade platform lifecycles Sole-source Sentinel after Boeing exit; B-21 is the only next-gen US bomber. Switching cost to the government is prohibitive.
entrants (Ursa Major, X-Bow, Anduril) emerging NOC + L3Harris/Aerojet were the only two US SRM suppliers; ~13k motors delivered 2024, scaling to ~25k by 2029. Pentagon actively diversifying.
Decades of classified IP, security clearances, and qualified facilities; new entrants can't easily replicate certified production lines.
Medium (3-5 yr visibility) $95.7B backlog (FY25) provides revenue visibility but is not a structural moat — recompetes and cancellations erode it (NGI).
SpaceX/Apex pressuring 150-satellite SDA commitment + Golden Dome SBI selection; threatened by vertically-integrated SpaceX/Starshield economics.
Dependencies
~85%+ of revenue; exposed to budget caps, CRs, shutdowns, and program cancellation (NGI wind-down cost Space $98M in Q1 FY26).
Revenue tied to the NDAA + appropriations; a ~$1.2T defense bill is a tailwind but fiscal/debt-ceiling risk could cap it (est.).
carbon fiber, microelectronics) SRM and satellite production depend on constrained material supply chains and qualified sub-tier vendors.
ULA) for placing satellites/interceptors on orbit Reliant on third-party launch; also a coopetition dynamic since SpaceX is both supplier and emerging competitor.
FFP early lots transfer inflation/overrun risk to NOC — already produced FY25 loss provisions and a Sentinel 'critical' breach.
Advantages
- Sole-source position on the two pillars of US strategic deterrence (B-21 bomber, Sentinel ICBM).
- One of only two US solid-rocket-motor suppliers — structural scale advantage as munitions demand surges.
- Early-mover Golden Dome space-based-interceptor selection (Jun 1 2026) pairing NOC fire-control pedigree with Apex bus throughput.
- Record $95.7B backlog and 1.10 book-to-bill provide multi-year revenue visibility.
- Strong FCF (~$3.3B FY25) supporting buybacks + a 22-year dividend-growth record.
- Margin-rich Mission Systems (15.1% Q1 FY26) diversifies away from lower-margin fixed-price hardware.
Weaknesses
- Fixed-price contracting on B-21/Sentinel transfers cost-overrun risk to NOC (FY25 B-21 loss provision).
- Space Systems is the slowest segment — declined ~8% in FY25 to $10.8B and took a $71M GEM 63XL launch-anomaly charge in Q1 FY26.
- Low organic growth (~2-4%) means the equity story leans on margin normalization + multiple, not top-line compounding.
- Extreme customer concentration (~85% US gov) — minimal commercial diversification vs RTX.
- Net debt ~$13B and a large pension whose mark-to-market swings drive reported EPS volatility.
- Moat erosion underway in both satellite buses (SpaceX/Apex) and SRMs (Anduril/Ursa Major/X-Bow).
Bottlenecks
- Fixed-price flagship execution — B-21 LRIP and Sentinel overruns directly compress earnings; Sentinel's 'critical' Nunn-McCurdy breach forced a restructure.
- Solid-rocket-motor production capacity — demand outstrips supply; NOC scaling from ~13k (2024) toward ~25k motors/yr by 2029 requires multi-year facility investment.
- Skilled-labor and security-cleared workforce constraints on classified programs.
- Launch cadence dependency — on-orbit Golden Dome interceptor demo (target 2027) and SDA deliveries gated by third-party launch availability.
- Sub-tier supply chain for microelectronics, propellants, and specialty materials limits production ramp.
Top signals & trends
Top signals
Demo selection ≠ production; a funded follow-on would be a major Space catalyst (fact).
Segment must prove the FY25 ~8% decline was a transition trough, not structural (fact).
Margin normalization off the FY25 loss-provision base drives the FY26 EPS inflection (fact).
Chronic overrun/schedule risk; first flight pushed toward 2027 (fact).
Direct funding of NOC's duopoly competitors signals intent to erode the franchise (fact).
Budget tailwind, but watch CR/shutdown/debt-ceiling risk (fact).
Trends
Potentially the largest new US defense architecture in decades; space-based interceptors a direct NOC growth vector (fact/est.).
Munitions, missile defense, and space are priority growth lines (fact).
Drives satellite volume but compresses per-unit economics and invites SpaceX/Apex low-cost competition (fact).
Volume tailwind (13k→25k motors/yr by 2029) but Pentagon funding new entrants to break the duopoly (fact).
Industry pushing back on FFP for development; future contracts likely more cost-plus, reducing NOC's overrun risk (est.).
Pressures legacy prime cost structures across launch, satellites, and propulsion (fact).
Ecosystem & competitor graph
Suppliers feed the company; customers pull from it. Line thickness shows the strength of each tie (supply-chain dependency, customer earnings contribution). Hover to isolate a tie.
Launch provider for satellites/interceptors (also a competitor — coopetition).
Launch on Atlas V/Vulcan; NOC GEM solid boosters fly on ULA vehicles.
Satellite-bus manufacturer; NOC's Golden Dome SBI bus partner for constellation-scale throughput (fact).
Avionics, guidance, and subsystems supplier across programs incl. Sentinel.
Comms/SATCOM subsystems supplier on USAF space programs (fact).
Specialty materials vendors (ammonium perchlorate, carbon fiber, microelectronics) Constrained sub-tier inputs for SRMs and satellites.
B-21 Raider, Sentinel ICBM, GBSD — largest customer relationship.
Missile-warning/tracking, Golden Dome SBI demo selection (Jun 1 2026, fact).
Transport + Tracking layer satellites — 150-satellite commitment (fact).
Missile-defense interceptors/sensors; Golden Dome architecture buyer.
Cygnus ISS commercial resupply, propulsion, and science programs (fact).
Largest defense prime; competes in space (missile-warning sats), missiles, and missile defense.
Missiles, sensors, missile-defense effectors; competes in Mission Systems and Golden Dome effector layers.
Other half of the solid-rocket-motor duopoly; Pentagon investing $1B in an L3Harris motor spinoff — direct SRM rival.
Defense/space prime; competes in satellites and strategic systems (ceded Sentinel to NOC).
Private; vertically-integrated launch + satellite manufacturing + gov services — most disruptive new-space threat.
Private new entrants in satellite buses + solid rocket motors eroding NOC's duopolies (Apex is also a NOC Golden Dome partner).