The largest global aerospace and defense technology companies are in the U.S. With combined total revenue of about $89.9 billion, Northrop Grumman and Lockheed Martin are among the American powerhouse business enterprises. The headquarters of Northrop Grumman is in Los Angeles, California, while Northrop Grumman is based in Bethesda, Maryland. From the start of January 2020, the shares for both companies were all trending at a steadily higher rate.
Northrop reported earnings that were going to please its investors, while Lockheed Martin did not report such results. Northrop's P/E is around 14.78, while the P/E ratio is roughly at 17.5. Lockheed Martin shares have grown considerably for the past few years, and it has surpassed Northrop Grumman, which is among its major competitors in the market. Therefore, performing a financial analysis of the two companies will assist in selecting, evaluating, and interpreting relevant information that will assist in assessing the firm’s financial stance and operating performance.
Valuation of the Firm to a Competitor
The price-to-earnings ratio (P/E) is a significant metric utilized by investors in determining a firm’s stock valuation. According to Murphy (2020), in addition to the P/E showing whether the stock of the firm is undervalued or overvalued, it assists in revealing the valuation of the stock and offers a comparison to its industry group. Hence, determining the P/E ratio is performed by dividing the market value per share by the earnings per share.
The P/E of Northrop Grumman is at 14.79, which is lower compared to its competitor Lockheed Martin at 17.05. On the other hand, the current share price of Northrop Grumman is at $339.2 compared to Lockheed Martin at $393.1. Thus, the interest in aerospace and defense allows us to perform an analysis of Northrop Grumman and its competitor Lockheed Martin. There is a variety of reasons that Lockheed Martin has a P/E ratio that is more favorable than Northrop Grumman.
The case for Lockheed Martin has a favorable P/E ratio, and higher shares price due to the fact that the company has recently won a significant contract from the government. According to Soderstrom (2019), Lockheed Martin won a U.S. Navy contract that was worth $831 million to produce for the government of Australia 15 F-35 aircraft. Subsequently, the firm has won in the contract an additional $327 million for procuring lead parts and materials that will be utilized for the production of aircraft. Thus, the program was going to bring to the company an estimated $1.7 billion that will support the thousands of jobs offered by Lockheed Martin.
Firm’s Current Price Compared to the Estimated Price
The current share price for Northrop Grumman is at $339.2 is higher compared to the estimated price, which is at $252.39. On the other hand, Lockheed Martin's current share price is also higher at $393.1 compared to the estimated price of $289.92. Through the use of the industry and sector P/Es, it will show the comparison for both the company’s TTM and estimated year-end. The estimated share price based on the industry’s TTM for Northrop Grumman is $252.39, while that for Lockheed Martin is $283.45.
On the other hand, based on the sector P/E, the estimated share price TTM for Northrop Grumman is $279.83, while that for Lockheed Martin is $283.58. The estimated price is higher for the sector P/E compared to the industry P/E for both companies. The rationale behind the estimated share price being higher using the sector P/E is due to it growing considerably at a higher rate. According to Jenkins (2017), the market assigns higher values for growth to the sectors that generate enormous profits. Subsequently, the stock for an industry that tends to have the market penalizes cyclical stocks as the performances tend to rise or fall with the economy.
A firm that Appears to be Undervalued
Determining the intrinsic value of a stock is significant for investors, which allows them to know whether the share price of the firm is undervalued or overvalued. Through the fundamental analysis of the two firms operating in the aerospace industry, the firm that its stock value is undervalued is Northrop Grumman. The conclusion that Northrop Grumman is undervalued is based on its lower P/E compared to Lockheed Martin which has a higher P/E.
A firm with industry and sector P/E that is higher has more speculation and is priced based on the value of the expectations of a bullish trend that has future potential. Hence, the investors in the stock market will be more willing to pay more for each $1 of Lockheed Martin's earnings. I suspect that this is the reason for Northrop Grumman being undervalued as the firm's historical P/E results allow the investors to estimate the price per share of the stock through utilizing average P/Es of the industry and sector. Therefore, viewing the P/E of the company offers the investors more insight that allows them to determine the firm's stock reasonability in relation to the peers operating in the same sector.
Jenkins, D. (2017). Lesson 16. Investing in stocks. SILO of research documents. https://silo.tips/download/lesson-16-investing-in-stocks#
Murphy, C. B. (2018, April 19). Assessing a stock's future with the price-to-earnings ratio and PEG. Investopedia. https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/
Soderstrom, A. (2019, December 2). Lockheed Martin wins $1.1B worth of contracts with Central Florida work. Orlando Business Journal. https://www.bizjournals.com/orlando/news/2019/12/02/lockheed-martin-secures-2contracts-worth-1-1b-with.html
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Essay Sample on Aerospace Giants Unveiled: A Financial Analysis of Northrop Grumman vs. Lockheed Martin. (2023, Nov 16). Retrieved from https://speedypaper.com/essays/essay-sample-on-aerospace-giants-unveiled-a-financial-analysis-of-northrop-grumman-vs-lockheed-martin
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