Northrop Grumman Corporation (NOC) is an aerospace and defense company. It operates through four segments—aeronautics systems; defense systems; mission systems; and space systems. It provides systems, products, and solutions in aerospace, electronics, information systems, and technical services, and serves government and commercial customers worldwide.
Teledyne Technologies Incorporated (TDY) provides electronic and communication products for wireless and satellite systems. The company operates through four segments: instrumentation; digital imaging; aerospace and defense electronics; and engineered systems. It markets and sells its products and services through sales forces, third-party distributors, and commissioned sales representatives.
In the federal government’s fiscal 2022 budget, President Biden has proposed $715 billion for weapons programs and key national security priorities to address emerging threats from China. This spending should drive the growth of companies in the aerospace and defense industry. Indeed, the U.S. aerospace and defense market is expected to grow at a 2.4% CAGR over the next nine years to hit $550.78 billion by 2030.
Investor optimism about the industry’s growth prospects is evident in the SPDR S&P Aerospace & Defense ETF’s (XAR) 4.6% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 1.4% gains. So, we think NOC and TDY should benefit substantially in the coming months.
TDY’s shares have lost 3.1% over the past month, while NOC’s rose marginally. But in terms of their past three months’ performance, NOC is a clear winner with 24.4% gains versus TDY’s 10.1% returns. But, which of these stocks is a better pick now? Let’s find out.
Latest Movements
On June 10, 2021, the U.S. Air Force awarded a $287 million base contract to NOC to provide engineering services to assist in sustaining the Minuteman III missile system. This, combined with a $2.3 billion Propulsion Subsystem Support Contract (PSSC) 2.0 awarded last month, allows NOC to offer the Minuteman III Systems Directorate unmatched expertise in maintaining its current nuclear deterrence capabilities.
Also this month, NOC was given the systems integrator role for C5ISR and control systems in the U.S. Coast Guard Offshore Patrol Cutter (OPC) by its prime contractor, Eastern Shipbuilding Group (ESG). NOC will integrate all cyber hardened C5ISR systems, including command and control, communications, navigation and the shipboard computer networking systems. On May 27, TDY’s Teledyne marine vehicles business announced the sale of two Teledyne Gavia SeaRaptor 6,000 meter rated autonomous underwater vehicles (AUVs) to Argeo of Norway, a growing subsea offshore service company. Enabling deep-sea surveys with its sonar, echo sounders, camera systems, and postprocessing and mosaicking software solutions, TDY’s SeaRaptor AUVs will contribute significantly to Argeo's growing fleet of AUVs and assist in valuable data collection.
TDY completed the acquisition of FLIR Systems, Inc. (FLIR) on May 14, and it will now operate in TDY’s digital imaging segment under the name Teledyne FLIR. Both companies will offer a uniquely complementary end-to-end portfolio of sensory technologies for all key domains and applications across a well-balanced, global customer base.
Recent Financial Results
NOC’s total sales for its fiscal 2021 first quarter, ended March 31, increased 6.2% year-over-year to $9.16 billion. Its total sales in the aeronautics systems segment are reported at $2.99 billion, up 5.2% from the prior-year period. The company’s total operating income came in at $2.82 billion for the quarter, which represents a 202.1% improvement year-over-year. While its transaction-adjusted net earnings increased 23.8% year-over-year to $1.08 billion, its transaction-adjusted EPS increased 27.6% year-over-year to $6.57. As of March 31, 2021, the company had $3.52 billion in cash and cash equivalents.
For its fiscal year 2021 first quarter, ended April 4, TDY’s net sales increased 2.7% year-over-year to $805.70 million. Its net sales in its engineered systems segment are reported at $104.70 million, up 8.5% from the prior-year period. The company’s non-GAAP operating income came in at $141.10 million for the quarter, which represents a 35.7% improvement year-over-year. TDY’s non-GAAP net income increased 39.8% year-over-year to $114.90 million. Its non-GAAP EPS increased 39.2% year-over-year to $3.02. The company had $3.23 billion in cash and cash equivalents as of April 4, 2021.
Past and Expected Financial Performance
NOC's revenue and EPS grew at CAGRs of 12.4% and 15.9%, respectively, over the past three years. The company’s levered free cash flow has increased at a 26.2% CAGR over the past three years.
Analysts expect NOC’s revenue to decrease 1.6% in its fiscal year 2021 second quarter (ending June 30, 2021), and 2.7% in the current year, but then increase 4.9% in the next year. Its EPS is expected to decrease 2.5% year-over-year in the second quarter, but then increase 3.9% for the current year and 3.2% next year. The stock’s EPS is expected to grow at a 5.8% rate per annum over the next five years.
In comparison, TDY’s revenue and EPS grew at CAGRs of 4.4% and 13.9%, respectively, over the past three years. The company’s levered free cash flow has increased at a 19.2% CAGR over the past three years.
Analysts expect TDY’s revenue to increase 38.3% for the quarter, ending June 30, 2021, 51.6% in the current year, and 17.6% next year. Its EPS is expected to increase 3% year-over-year for the second quarter, 11.2% for the current year, and 22.7% next year. Its EPS is expected to grow at 18.3% rate per annum over the next five years.
Profitability
NOC's trailing-12-month revenue is 12 times TDY’s. NOC is also more profitable, with a 46.1% return on equity versus TDY’s 13.3%.
Also, NOC’s ROA and ROTC values of 6.2% and 10.1%, respectively, compare with TDY’s 5.6% and 6.6%.
Valuation
In terms of non-GAAP forward P/E, TDY is currently trading at 33.39x, which is 120.3% higher than NOC’s 15.16x. NOC’s 1.46x non-GAAP forward PEG is significantly lower than TDY’s 2.26x.
Also, in terms of forward EV/EBITDA, NOC’s 10.5x is 106.3% lower than TDY’s 21.66x.
Thus, NOC is more affordable here.
POWR Ratings
While TDY has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, NOC has an overall grade of B, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both the stocks have been graded a B for Quality, which is consistent with their higher-than-industry profitability ratios.
In terms of Value, NOC has been graded a B, which is consistent with its lower-than-industry valuation ratios. The company’s 1.46x non-GAAP forward PEG is 18.2% lower than the 1.78x industry average. However, TDY’s C grade for Value signifies its slightly higher valuation compared to its peers. The company has a 2.26x non-GAAP forward PEG, which is 26.8% higher than the 1.78x industry average.
f 64 stocks in the Air/Defense Services industry, TDY is ranked #28, while NOC is ranked #5.
Beyond what we’ve stated above, our POWR Ratings system has also rated both NOC and TDY for Growth, Momentum, Stability and Quality.
Get all TDY ratings here. Also, click here to see the additional POWR Ratings for NOC.
The Winner
The Pentagon’s recently proposed defense budget positions both NOC and TDY well to grow. However, based on better financials, high profitability ratios and a relatively lower valuation, NOC appears to be a better buy here.
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 access the top-rated stocks in the Air/Defense Services industry.
NOC shares were trading at $374.57 per share on Friday afternoon, up $2.06 (+0.55%). Year-to-date, NOC has gained 24.04%, versus a 13.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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