When considering investments in the defense sector, two giants often come to mind: Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC). Both are titans in aerospace and defense, but a closer examination reveals distinct differences that could sway investor decisions. This analysis delves into a comparative study, weighing factors like stock performance, revenue growth, profitability, and future prospects to determine whether Northrop Grumman or Lockheed Martin presents a more compelling investment opportunity today.
Northrop Grumman Outpaces Lockheed Martin in Recent Stock Performance
Over the past three years, Northrop Grumman’s stock (NOC) has demonstrated stronger growth compared to Lockheed Martin (LMT). From early January 2021 to the present, NOC stock has surged by approximately 65%, climbing from $305 to around $505. In contrast, LMT stock has risen by 55% from $355 to about $555 during the same period. While both have outperformed the S&P 500’s 50% gain, Northrop Grumman’s performance edge is notable.
However, the journey has been volatile. In 2021, LMT stock showed 0% returns, followed by a robust 37% in 2022 and a -7% dip in 2023. NOC experienced more consistent positive returns in 2021 (27%) and 2022 (41%), but a steeper decline in 2023 (-14%). Interestingly, both LMT and NOC underperformed the S&P 500 in specific years, highlighting the challenge of consistently beating market benchmarks, even for industry leaders.
Revenue Growth: Northrop Grumman Takes the Lead
Analyzing revenue growth reveals another area where Northrop Grumman has shown greater momentum. Lockheed Martin’s revenue has increased at an average annual rate of 1.1%, from $65.4 billion in 2020 to $67.6 billion in 2023. Meanwhile, Northrop Grumman has achieved a more robust average annual revenue growth of 2.3% over the same period, increasing sales from $36.8 billion to $39.3 billion.
Lockheed Martin’s revenue growth has been fueled by increased production in key programs, including Sikorsky helicopters, AC-3 aircraft, Long Range Anti-Ship Missiles, and the Joint Air-to-Surface Standoff Missile program. They also benefit from higher contract volumes for the F-35 program and national security space initiatives. Ongoing global geopolitical instability, particularly the Russia-Ukraine and Israel-Hamas conflicts, is expected to sustain elevated defense spending, further benefiting Lockheed Martin.
Northrop Grumman’s revenue expansion is primarily driven by its space systems segment, particularly strong sales in strategic missiles. The company’s order backlog has swelled to $83 billion, propelled by rising demand for space technologies. Key programs contributing to this growth include the Ground Based Strategic Deterrent, Next-Generation Overhead Persistent Infrared Polar (NextGen Polar), and the Next Generation Interceptor programs. Furthermore, Northrop Grumman’s Aeronautics and Defense segments have also demonstrated steady growth recently, with a notable 16% year-over-year increase in Aeronautics sales for the first half of 2024, attributed to increased F-35 aircraft production components.
Profitability and Financial Stability: Lockheed Martin’s Edge
While Northrop Grumman leads in revenue growth, Lockheed Martin exhibits superior profitability. In 2023, Lockheed Martin’s operating margin stood at 12.6%, slightly down from 13.2% in 2020. Conversely, Northrop Grumman’s operating margin has contracted more significantly from 11% to 6.5% during the same timeframe.
In terms of financial risk, both companies present a relatively stable picture. Lockheed Martin’s debt-to-equity ratio is a lower 15% compared to Northrop Grumman’s 24%. However, Northrop Grumman holds a slightly stronger cash position, with cash representing 7% of assets, versus Lockheed Martin’s 5%. This suggests Lockheed Martin has a more conservative debt profile, while Northrop Grumman possesses a slightly larger cash buffer.
Investment Outlook: Why Northrop Grumman Could Be the Stronger Bet
Considering all factors, Northrop Grumman appears to be a potentially more attractive investment compared to Lockheed Martin at current valuations. NOC stock trades at approximately 1.8 times its trailing revenues, aligning closely with its average price-to-sales (P/S) ratio over the past three years. In contrast, LMT stock is trading at a higher multiple of 1.9 times revenues, exceeding its historical average P/S ratio of 1.6x.
The current geopolitical climate favors defense stocks, justifying a potential increase in valuation multiples across the sector. While the market has already priced in some premium for Lockheed Martin, Northrop Grumman seems to offer more headroom for valuation expansion to align with its historical averages and growth trajectory.
While both NYSE: LMT and NYSE: NOC represent solid long-term investments in the defense sector, the analysis suggests that Northrop Grumman currently presents a more compelling buying opportunity due to its stronger revenue growth prospects and potentially undervalued stock price relative to its historical performance and peers. Investors seeking exposure to the defense industry might find NOC to be a strategically advantageous addition to their portfolios.
For further comparative analysis, exploring Lockheed Martin’s Peers can provide a broader industry perspective. Additionally, resources like Peer Comparisons offer valuable insights for comparing companies across various sectors.
