NOC is a buy (low conviction); DCF fair value $672 > market $542; uncorrelated to macro economy provides diversification.

Defense contractor Northrop Grumman reported a record backlog of over 105 billion dollars. The company's increasing capacity to deliver on that backlog more quickly as its customers are asking for more urgent production capacity.

But does this make Northrop Grumman stock a buying opportunity? Let's take a closer look and answer that question. So this business has grown faster than usual over the previous decade.

In 2017, the company reported 24 billion dollars in revenue and that's increased to 43 billion over the trailing 12-month period. The management team is forecasting 5% revenue growth in 2026 with those figures likely to increase going forward.

Orders are increasing and internationally sales are booming. Northrop Grumman is working to accelerate manufacturing effectiveness and speed in order to deliver on those orders more quickly.

With wars raging on between the United States, Israel, Iran, and the region, and then the war in Russia and Ukraine, the worldwide needs for defense is increasing. And that's unfortunate for many reasons, but for the company, sales are booming.

Northrop's operating profit margins have been trending lower. However, in recent quarters that has inflected higher. At 10.72%, its operating profit margin is below where it was in 2017 at roughly 14%.

Similarly, its returns on invested capital at 13.21% are not all that elevated. However, when you compare with its weighted average cost of capital, which is relatively low, it still generates shareholder value with every dollar it reinvests to the company.

Another benefit of Northrop Grumman being a defense contractor is that it's less correlated with the macroeconomy. Its business doesn't depend on whether or not the US economy is growing, whether the unemployment rate is decreasing, whether interest rates are higher or lower.

Its sales are related to its relationship with governments in the United States and worldwide.

And if there is increasing geopolitical tension, orders for its products increase. As we're seeing most recently, United States and Israel, the war in Iran, and the retaliation, and the war in Ukraine is causing increasing utilization of existing stockpiles of munitions, and that's causing increasing demand to refill those backlogs and add some more capabilities to offset some of the increasing geopolitical tensions.

The valuation has been volatile, but has traded within a range. Northrop Grumman is trading at a forward price-to-earnings of 17.8, which is about the average valuation this stock has traded for according to this metric going all the way back to late 2023.

Comparing against some other defense contractors and similar companies like Raytheon and Boeing, Northrop Grumman is selling at a relatively cheaper valuation. Today, I also updated my discounted cash flow valuation for Northrop Grumman, revising higher my expected free cash flow from the company.

Now, this isn't a fast-growing business, and I'm not forecasting it as such. I'm estimating $3.36 billion in free cash flow in 2026, growing to just 3.88 billion by 2030. That's not a very significant growth rate in free cash flow for several years to the future.

Still, even despite those relatively meager growth prospects, I calculated a fair value of the business at $672, which is well above the current market price of $542.

As I mentioned earlier, one of the attractive features of Northrop Grumman stock is that it's uncorrelated to the growth of the macroeconomy. And that provides investors a bit more diversification in your portfolio.

Since it's not correlated with macroeconomic performance like some of your other investments in your portfolio might be, the share price can move higher when the rest of your portfolio is moving lower.

Or the share price can move higher if the US economy is in a recession. Not that it will guaranteed move higher in that event, but a US recession is not likely to impact Northrop Grumman stock as much as maybe some other stock might be impacted.

I've had this stock ranked as a buying opportunity all year in 2026, and I last updated that ranking on April 13th, while also suggesting that I had a low conviction level on that ranking, meaning I wasn't very confident in this stock being a buying opportunity, but my initial estimates suggested it was.

And today I will be reiterating that ranking. I think it is a buying opportunity, but I have a relatively low conviction level on this ranking. I will say, however, I prefer Northrop Grumman stock over Raytheon stock.

Comparatively speaking, I see Northrop Grumman being a more attractive investment at current market prices.