Defense contractor Northrop GrummanIt is (NYSE:CNP) the largest program is way over budget and investors are waving the white flag. Northrop Grumman shares fell 7% as of 11 a.m. ET Thursday after the company reported a fourth-quarter loss and provided a gloomy outlook for its newest bomber.
Revenue Bombshell on Rising B-21 Costs
Northrop Grumman is one of the nation’s largest defense contractors at the time and the prime contractor for two-thirds of the United States’ planned nuclear triad renewal, considered a top government priority. Northrop was tasked with developing a new bomber and missile designed to deter a possible nuclear attack.
But the company’s recent results leave much to be desired. Northrop reported a loss of $1.45 per share in the fourth quarter, significantly lower than Wall Street’s expectations of a profit of $5.80 per share. The main culprit was a $1.56 billion charge against the B-21 Raider bomber it is building for the U.S. Air Force, a reflection of spiraling costs since the contract was awarded in 2015.
Northrop warned that it stood to lose money on the first five batches of planes delivered under the fixed-price deal, which capped the price per plane at about $700 million. Even without those fees, results were lackluster, with the company benefiting from lower interest and corporate expenses that offset weakness in its space and mission systems units.
The company targets earnings per share of between $24.45 and $24.85 in 2024 with an operating margin of around 11%. That’s about what analysts expected. Northrop’s book-to-bill ratio, a measure of future business booked versus what was billed during the quarter, was a solid 1.02, but it lagged its rival. Lockheed MartinThe new orders-to-bills ratio of 1.24 for the quarter.
Is Northrop Grumman a Buy After Its Big Charge in the Fourth Quarter?
It’s worth noting that Northrop has been talking about potential charges over the bomber program for about two years, so this charge wasn’t a complete surprise. But some investors were hoping the Pentagon would be willing to reopen the contract or absorb some of the cost overrun, which doesn’t appear to be happening.
Defense investors There is a need to focus on the long term, as these massive programs typically take years to implement. It’s worth noting that while Northrop expects the B-21 to weigh on cash generation through 2026, the company still expects free cash flow growth of 15% or more per year in the coming years, which means there will be plenty of liquidity available for stocks. buybacks and to finance the dividend currently transferor approximately 1.7%.
Northrop Grumman shares have largely tracked the market’s performance over the past five years, and this will likely be the stock’s general trend in 2024 as well.
There’s no reason for existing Northrop investors to panic, but there are also better opportunities in the defense sector right now. Investors can afford to be patient if they are considering investing new money in Northrop Grumman.
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Lou Whiteman has positions at Lockheed Martin. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
Why Northrop Grumman Stock Is Being Clubbed Today was originally published by The Motley Fool
