A Member of Pat McKeough’s Inner Circle recently asked for his advice on Northrop, a leading U.S. defense contractor that designs, develops, and produces advanced aerospace, missile, space, and command-and-control systems for the Department of Defense and allied governments.
Pat likes the steady sales and earnings and strong order backlog which provides multi-year revenue visibility into key aspects of the business. However, Pat notes that while the valuation is reasonable right now, there’s a limited valuation cushion if U.S. defense spending slows, European rearmament pauses, or political pressure on defense contractors intensifies.
NORTHROP GRUMMAN CORP. (Symbol NOC on New York) is a leading global aerospace and defence technology company.
Jack Northrop founded the business in 1939 in Hawthorne, California, as Northrop Aircraft Inc. In 1994, the company acquired Grumman Corp., a military aircraft systems specialist. The combined firm became Northrop Grumman Corp.
Today, Northrop provides space systems, military aircraft, missile defence, advanced weapons and long-range fire capabilities, mission systems, networking and communications, and strategic deterrence systems. The company also provides breakthrough technologies such as advanced computing and microelectronics.
Northrop sells globally. But the company’s principal customers are the U.S. Department of Defense and the intelligence community. The U.S. government accounted for 87% of its sales in 2024.
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Northrop operates through four segments: Aeronautics Systems (29% of revenue), Defense Systems (18%), Mission Systems (29%), and Space Systems (24%).
In September 2025, the U.S. Air Force awarded Northrop a contract for Air Force modelling and simulation support services, valued at up to $972 million. The contract includes fixed-price, time-and-materials, and cost-reimbursable options, which are performed both within the U.S. and internationally. The company should complete the contract by September 14, 2030.
Northrop faces tariff and political challenges
In the quarter ended September 30, 2025, the company’s revenues rose 4.3%, to $10.42 billion from $10.0 billion a year earlier. Northrop earned $1.10 billion in the quarter, up 7.2% from $.03 billion. Due to fewer shares outstanding, its earnings per share rose at a faster rate of 9.5%, to $7.69 from $7.02.
The shares trade at a reasonable 20.1 times the company’s 2026 earnings estimate of $28.84 a share. The $9.24 dividend yields 1.6%.
Northrop is not immune to the current tariff dispute. For example, the company is a principal partner of Lockheed Martin in the production of the F-35 Lightning II, a stealth multirole fighter jet. Due to the trade war, however, some U.S. allies, including Canada and Portugal, are re-thinking their plans to buy the fighter for their forces. Ongoing tensions with the U.S. could cause its allies to sidestep U.S. defence companies when buying military equipment for their forces.
Recommendation in Pat’s Inner Circle: Northrop Grumman Corp. is okay to hold.
