Shares of Northrop Grumman (NOC 1.82%) are up a solid 6% since the defense giant reported its first-quarter earnings two months ago. That's pretty impressive performance, when you consider that the S&P 500 index of large companies is down 11% over the same time period.

With Q2 earnings peeking over the horizon (less than one month away), now might be a good time to take a look back and consider: Exactly how did Northrop Grumman beat earnings last quarter? And what are the chances the company will repeat the feat in Q2?

Q1 by the numbers

Northrop Grumman reported $6.10 per share in earnings last quarter, $0.14 more than Wall Street was expecting. And yet, surprisingly, the company actually missed on sales, which declined 2% year over year.  

More than that, sales in three of Northrop's four biggest business divisions -- mission, aeronautics, and defense systems -- all declined, by 4%, 10%, and 18%, respectively.  

There was one notable exception to the declines in Northrop's business, however, and it came from a most unexpected source. Ordinarily, you might expect Northrop's more "military" businesses to provide the bulk of the growth, what with the war in Europe and weapons systems being in high demand on the continent. But it wasn't Northrop's military business at all that provided the growth last quarter.

Instead, it was the space business.

Northrop's shining star

And it wasn't even close. As sales plunged in mission systems, aeronautics, and defense, Northrop's cobbled-together space franchise roared ahead to score a 13% sales gain in Q1. Indeed, with $2.8 billion in sales in the quarter, space systems became this defense contractor's biggest moneymaker (edging out aeronautics for the biggest source of Northrop's revenue).

Macro-economically speaking, this makes sense. As Northrop CEO Kathy Warden observed on the company's post-earnings conference call, defense spending in the U.S. is only growing about 4% to 5% per year despite the heightened threat level in Europe. In contrast, NASA's budget request for fiscal 2023 included an 8% increase -- nearly twice as big as the Pentagon's budget boost -- as the U.S. government antes up to support "a new era of space exploration."

On a more granular level, too, business is simply booming for Northrop in space. On the call, Warden highlighted:

  • Continued funding of Northrop's building of the Ground Based Strategic Deterrent (GBSD), which actually refers to another four-letter acronym, America's ICBMs.
  • Northrop's win of a nearly $700 million award for 42 satellites in low-Earth orbit that provide "high-speed, low-latency communications for the Space Development Agency's transport layer."
  • A $340 million contract for Deep Space Advanced Radar Capability (DARC) that dramatically improves situational awareness.
  • And of course the big one -- a $2 billion award from Boeing and Lockheed Martin's United Launch Alliance to supply the GEM 63 solid rocket boosters that will help ULA's space rockets send Amazon's Project Kuiper satellites to the stars.

That's on top of the hundreds of millions of dollars that NASA is already sending Northrop's way to hire the company to help build its SLS megarocket, and participate in the Project Artemis project to return America to the moon.

Why Northrop investors should love space

Given all the above, it's no wonder that Northrop raised its guidance for future space systems sales last quarter. Northrop now anticipates the space segment will be its biggest revenue producer ($11 billion-plus) this year, with an improved profit margin of 10% or better (up from 9.1% in Q1). Based on those numbers, space could easily account for up to one-third of the $3.6 billion in operating profit that Northrop earns this year, according to data from S&P Global Market Intelligence.  

That's good news for investors. Strange as it sounds -- what with the Pentagon not growing its defense budget all that much, and with Warden warning investors that "we haven't seen a dramatic shift in immediate spending plans" despite multiple European countries saying they plan to increase defense spending, near term -- it seems space will need to do much of the heavy lifting at Northrop. If Northrop Grumman outperforms analyst expectations for only 5% to 6% revenue growth this year, space will probably be the reason why that happens.

More than ever before, Northrop Grumman today is transforming itself into a bona fide space stock, and for investors, that's a good thing.