- Revenue Growth: Q3 revenue reached $10.4 billion, reflecting a 4% year-over-year increase, with 5% organic growth driven by strong performance in the Defense Systems segment (14% Y/Y sales growth).
- Margin Expansion: Segment operating margin improved to 12.3%, a 80 basis points increase YoY, alongside a 10% rise in earnings per share (EPS) to $7.67.
- Free Cash Flow Surge: Free cash flow surged 72% YoY to $1.3 billion, with full-year guidance reaffirmed at $3.05–$3.35 billion despite revenue guidance revisions.
- Strategic Investments: Over $2.1 billion allocated to R&D and 4% of sales to CapEx over two years, supporting capacity expansions like doubling tactical missile solid rocket motors production.
- 2026 Outlook: Anticipates mid-single-digit organic sales growth, low-to-mid 11% operating margins, and $3.1–$3.5 billion in free cash flow, with potential upside from B-21 program production rate increases.
Financial Performance
The company's financial performance was driven by the strong growth in the Defense Systems segment, with sales up 14% year-over-year. The segment operating margin rate also improved, driven by the company's focus on capacity and capability investments. The company's free cash flow guidance for the full year remains unchanged at $3.05 billion to $3.35 billion.
Outlook and Guidance
For 2026, Northrop Grumman expects mid-single-digit organic sales growth, a segment operating margin rate in the low to mid 11% range, and free cash flow of $3.1 billion to $3.5 billion. The company's guidance suggests a continued strong performance, driven by the growth in the Defense Systems segment and the expected increase in production rates for the B-21 program.
Valuation
Northrop Grumman's current valuation metrics are: P/E Ratio of 21.34, P/B Ratio of 5.36, P/S Ratio of 2.1, EV/EBITDA of 12.48, Dividend Yield of 1.46%, and Free Cash Flow Yield of 2.14%. The company's ROE is 26.04%, and ROIC is 9.61%. Analysts estimate next year's revenue growth at 5.1%. The current valuation suggests that the market is pricing in a moderate growth rate, but the company's strong performance and guidance suggest that it may be undervalued.
Program Updates
The B-21 program is seeing active discussions for a potential increase in production rate, which could have a material impact on the company's financials. Northrop Grumman has not included FXX or B-21 acceleration in its 2026 outlook, but a win would bring increased revenue and reasonable returns. The company is also working on missile defense and space opportunities, including the Golden Dome program.
Investment Highlights
The company's investments in capacity and capability, particularly in the Defense Systems segment, are expected to drive significant growth. CEO Kathy Warden mentioned that the investments are intended to drive significant growth, citing DS's solid growth rate the previous year. The company has also invested in research and development, with over $2.1 billion invested in internal research and development to maintain technology leadership and drive innovation.