Where did third-quarter results exceed expectations?

  • Northrop Grumman reported third-quarter revenue of $11.1 billion, in line with consensus; adjusted earnings per share were $7.89, above consensus of $7.16.
  • Aeronautics Systems revenue rose 14% year over year to $3.58 billion, above consensus of $3.47 billion, driven mainly by the timing of material cost recognition on F-35 production lots and increased sustainment business; Defense Systems revenue rose 12% year over year, driven by Sentinel, guided rockets and solid rocket motors.
  • The company raised its 2026 adjusted earnings-per-share guidance from $28.60–$29.10 to $29.35–$29.75. Bernstein raised its 2026 forecast from $29.05 to $29.86, but trimmed its 2027 forecast from $30.67 to $30.54: a higher revenue forecast was offset by the effects of items below operating profit.

Why has the growth outlook improved while margins remain under pressure?

  • Backlog reached $109.6 billion at the end of the third quarter, up 5% sequentially and 20% from 12 months earlier; Aeronautics Systems and Defense Systems backlog rose 9.1% and 5.2% sequentially, respectively, providing a foundation for future revenue.
  • Bernstein raised its 2027–2030 Aeronautics Systems revenue outlook, primarily on expectations for higher B-21 production and F-35 modification and sustainment revenue. The company plans to invest $2.5 billion over several years to support accelerated B-21 production, with most spending concentrated in 2027–2028; the firm expects incremental revenue to begin appearing in 2028, with B-21 revenue of about $8 billion in 2030.
  • Revenue growth does not immediately translate into higher margins. Defense Systems’ third-quarter operating margin was 10.8%, down 0.6 percentage points year over year, mainly because cost-type contracts accounted for a larger share; Bernstein expects the B-21 and Sentinel cost-plus development programs to depress margins in the near to medium term.

How does missile demand flow through to the company’s business?

  • Northrop Grumman supplies solid rocket motors for multiple missile systems, so contracts for RTX and Lockheed Martin to increase missile production benefit its motor business; the company is also working to become a second supplier for high-demand interceptors such as PAC-3.
  • Framework agreements announced in the third quarter exceeded $3 billion, including approximately $2 billion to support PAC-3 MSE solid rocket motor production and approximately $1 billion to support increased production of THAAD components over the next seven years. On that basis and in light of Sentinel’s progress, Bernstein raised its 2027–2030 Defense Systems revenue outlook.
  • Converting orders also depends on capacity: the company’s West Virginia plant has doubled its capacity since 2021 and is investing to increase it by a further 50% by early 2027; its Maryland plant’s capacity is expected to triple by 2030.

What constraints do other businesses and the budget place on the overall assessment?

  • Mission Systems revenue rose 2% year over year to $3.15 billion in the third quarter, below market consensus; its operating margin was 15.8%, above consensus, but operating profit fell 3% year over year as the margin declined. Space Systems revenue also rose only 2%, including a $136 million reduction in sales from CRS missions due to launch timing.
  • The US defense budget continues to operate under a temporary appropriations framework. Most of the company’s programs rely on base budget requests or export sales, but a significant portion of its weapons business involves funding arranged through the budget reconciliation process; Bernstein considers the appropriations process uncertain and has reduced its valuation multiple because of budget concerns.
  • Bernstein raised its price target from $556 to $590 and maintained its Market Perform rating; the EV/EBITDAP valuation multiple used remains 12.8 times. The higher target primarily reflects improved growth expectations for Aeronautics, Defense and Mission Systems.