Boeing vs. Northrop Grumman: Which Aerospace & Defense Stock is a Better Buy?

The Boeing Company (BA) and Northrop Grumman Corporation (NOC) are two prominent players in the aerospace and defense sector, BA operates through four segments—Commercial Airplanes; Defense; Space & Security; Boeing Global Services; and Boeing Capital. NOC operates through four segments: Aerospace Systems; Innovation Systems; Mission Systems; and Technology Services.  

Because a $706 billion Pentagon spending bill has been advanced by the House Appropriations Committee on a party-line vote, the aerospace and defense industry is expected to attract investors’ attention in the coming months. Furthermore, the demand for aerospace and defense equipment is increasing as several countries focus more on strengthening their defense capabilities. Investors’ interest in this space is evidenced by the iShares U.S. Aerospace & Defense ETF’s (ITA) and SPDR S&P Aerospace & Defense ETF’s (XAR) 29.1% and 36.8% returns, respectively, over the past nine months, versus  the SPDR S&P 500 ETF Trust’s (SPY) 25.1% gains. The global aerospace and defense market is expected to hit  $973.2 billion in 2025, growing at a 6% CAGR.

While NOC has gained 15.7% over the past nine months, BA has returned 35.6%. However, in terms of the past six months’ performance, NOC is a clear winner with 21.1% returns versus BA’s 9%. But which of these two stocks is a better pick now? Let's find out.

Latest Movements

On April 12,  NOC and the company’s wholly owned subsidiary, SpaceLogistics LLC, successfully completed the docking of the Mission Extension Vehicle-2 to the Intelsat 10-02 commercial communications satellite to deliver life-extension services. NOC is the only provider of flight-proven life extension services for satellites, and it was the second time the company has docked two commercial spacecraft in orbit. 

On July 14, BA and SkyNRG Americas formed  a partnership focused on scaling the availability and use of sustainable aviation fuels globally. Boeing will also invest in SkyNRG Americas' SAF production project, for which Alaska Airlines is a partner. Boeing, SkyNRG, and SkyNRG Americas will work together to accelerate SAF development globally, focusing on scaling production capacity, building awareness, and engaging stakeholders throughout the value chain, including airlines, governments, and environmental organizations.

Recent Financial Results

NOC’s total sales increased 6.2% year-over-year to $9.16 billion for the first quarter ended March 31, 2021. The company’s adjusted net earnings came in at $1.08 billion, up 23.8% year-over-year. Its adjusted EPS came in at $6.57, up 27.6% year-over-year.

For the first quarter, ended March 31, 2021, BA’s revenues came in at $15.22 billion, which represents a 10% decrease from the prior-year quarter. The company’s net loss came in at $561 million, versus $641 billion in the year-ago period. Its non-GAAP loss per share was  $1.53 compared to $1.70 in the prior-year quarter.

Past and Expected Financial Performance

NOC’s total assets have increased at a 6% CAGR  over the past three years. The company’s revenue is expected to grow 4.9% in 2022. Its EPS is expected to grow 3.9% in its fiscal year 2021, and 4.1% in fiscal 2022. Furthermore, its EPS is expected to grow at a 5.8% rate per annum over the next five years.

In comparison , BA’s total assets have increased at a 9.7% CAGR over the past three years. Analysts expect the company’s revenue to grow 13% in its fiscal year 2022. Its EPS is expected to increase 88.7% in fiscal 2021, and 498.5% in fiscal 2022. Also, BA’s EPS is expected to grow at a 12.3% rate  per annum over the next five years.

Profitability

BA’s trailing-12-month revenue is 1.51 times what NOC generates. However, NOC is more profitable, with a 12.10 net income margin  versus BA’s negative value.

Also, NOC’s ROA and ROTC of 6.21% and 10.13%, respectively, compare favorably with BA’s negative values.

Valuation

In terms of forward EV/Sales, BA is currently trading at 2.25x, which is 17.2% higher than NOC’s 1.92x. And in terms of forward EV/EBITDA, BA’s 38.47x is 273.5% higher than NOC’s 10.30x.

So, NOC is the more affordable stock.

POWR Ratings

BA has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. However, NOC has an overall B rating, which represents a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree. 

BA has a D grade for Quality. This is justified as its 2.04% trailing-12-month ROTA  is 50.5% lower than the 4.12% industry average. NOC’s B grade for Quality is in sync with its 10.90% trailing-12-month ROTA, which is 164.6% higher than the 4.12%industry average.

BA has a D grade  for Value also. This is in keeping with its 25.73x forward non-GAAP P/E of, which is 22.8% higher than the 20.95x industry average NOC has a B grade for Value, which is consistent with its 14.83x forward non-GAAP P/E, which is 29.2% lower than the 20.95x industry average.

Furthermore , BA has a D grade for Stability, which is in sync with its 1.63 beta, NOC’s 0.83 beta helped it earn a B grade for Stability.

Of the 62 stocks in the Air/Defense Services industry, BA is ranked #58 and NOC is ranked #7.

In addition to the POWR Ratings grades we’ve just highlighted, we’ve rated both BA and NOC for Growth, Sentiment, and Momentum also. Click here to see the additional ratings for BA. Also, get all of NOC’s ratings here.

The Winner

While the aerospace and defense industry is expected to witness decent growth in the coming months, NOC seems to be a better bet in this space based on its relatively cheaper valuation and higher profitability.

Our research shows that the odds of success increase if one  bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about top-rated stocks in the Air/Defense Services industry.

NOC shares were trading at $363.89 per share on Friday afternoon, down $0.23 (-0.06%). Year-to-date, NOC has gained 20.50%, versus a 16.54% rise in the benchmark S&P 500 index during the same period.

Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand.

More...