Defense giant Northrop Grumman (NOC -0.10%) closed out last week with a 5% gain after reporting third-quarter earnings Thursday morning. But there's only one reason why Northrop stock scored any gains whatsoever: space.

Northrop by the numbers

You see, Northrop's numbers last week weren't exactly great. Overall, sales grew 3% year over year to an even $9 billion. Earnings, however, declined 11% year over year to just $5.89 per share, yielding what stock market experts like to call a "mixed quarter" -- one number up, the other down.  

And when broken into component parts, even Northrop's "up" number was mostly down:

  • Aeronautics revenue: down 7% year over year
  • Defense systems revenue: down 5%
  • Mission systems: up only 1%
  • But space systems revenue soared 18%

From the above, you can probably figure out the one reason I say that Northrop Grumman stock was up last week. While every other business segment within the company languished, space swooped in to save the day for Northrop.

Space is big and getting bigger

This wasn't a new development for Northrop. Indeed, year to date, space is the only Northrop division showing any sales growth at all. (Even Mission systems, up 1% in Q3, is down for the year.) And it also probably won't end with Q3, either.

CFO David Keffer said on the quarterly conference call that he expects space to "remain Northrop's fastest-growing business." Indeed, space was the only Northrop division that raised sales guidance for 2022 last week. Management now expects to generate roughly $12 billion in space sales this year, versus $11 billion expected back in July. Northrop noted that among its growth areas within the space division were work on the Space Development Agency's Tranche 1 Transport Layer and Tranche 1 Tracking Layer spy satellite programs, which are still getting spun up, and increased production of GEM63 solid rocket boosters needed to launch Amazon's Project Kuiper satellites into orbit.  

That latter project hasn't even begun launching, and promises to provide years of revenue for Northrop's space division as Amazon advances toward putting more than 3,000 communications satellites in orbit.

Valuing Northrop Grumman stock

So is Northrop Grumman a buy based on the strength of its space program alone? Not necessarily.

While sales are certainly going gangbusters, Northrop noted that the profit margin in the space segment is depressed due to the early stage of many projects, which have not yet reached sufficient scale of production to yield strong profit margins. Operating profit margin at space, accordingly, didn't rise, but rather fell in Q3 -- down 150 basis points to 9.2%.

With luck, that trend will reverse over time. For the time being, however, strength in space isn't translating into much improvement in Northrop's overall numbers. Guidance through the end of fiscal 2022 still has Northrop posting an operating profit margin of between 9.8% and 10% on sales of about $36.4 billion -- unchanged from projections three months ago -- which should translate into earnings of no more than $25.10 per share this year.  

That works out to a price-to-earnings (P/E) ratio of about 21 for Northrop stock -- not insanely expensive, but above the average 19.4 P/E ratio of the S&P 500 as a whole. For a stock growing earnings at less than 1% annually over the next five years (according to analysts), and paying a sub-par 1.3% dividend yield, that doesn't seem like much of a bargain to me.  

I won't say don't buy Northrop, necessarily, but if you do try to buy, also try to get it at a better price than what it's selling for today.