Northrop Grumman: Backlog, Margin Friction

Initiating with a Hold rating and a $564 PT, Northrop Grumman (NOC) is a global leader in defense

systems, from autonomous aircraft to mission avionics to next-gen space assets. Beneath the surface of this mature defense giant are two opposing macro trends—a defense budget supercycle amid rising geopolitical risk vs. cost-push inflation and execution risk. Durable tailwinds (record $92.8 bn backlog and a 1.45X book-to-bill ratio) deliver >90% revenue visibility into FY26E, a rarity in Industrials and a key driver of liquidity and FCF visibility. However, while investors prize long- cycle commitments, our cautious near-term margin forecasts (FY25E EBITDA $6.3 bn, +2.2% y/y; FY26E $7.1 bn, +12.7% y/y) force a reality check. We took a haircut where there wasn’t one: our model includes a $477 mn B-21 program charge and structurally lower EBITDA margins (FY25E 14.9%; FY26E 15.9%), slightly below the Market, given inflation dynamics and uneven program cost normalization. Yes, normalized capex should support earnings power, but capex relief won’t solve sticky cost inflation or embedded ramp risk in B-21 and Sentinel. In this push-pull, our 13.5X EV/EBITDA target multiple is a hedge, rewarding unmatched visibility but discounting a fragile margin recovery. Admittedly, any meaningful program misstep would be a test, especially with higher-for-longer rates. The math: defense supercycle meets margin friction; R/R well contained.

## Margin Friction Persists
We believe Northrop’s record $92.8bn backlog delivers unrivaled visibility compared to much of the

global defense complex. Our view is both scale- and quality-based. A 1.45x book-to-bill signals