Space could be the next frontier for investors; industry analysts believe space could be a $1 trillion industry by 2040. Wall Street is already looking ahead; several new space-focused companies have gone public in recent years. However, the nascent industry is still riskier than most, with no clear picture of which companies will become the big winners over the coming years.
Instead of putting your money into unproven, speculative question marks, consider proven winners with existing businesses supporting their space segments. Aerospace and defense company Northrop Grumman (NOC -0.02%) is my favorite of this group. The company's space ties go back to the earliest satellites and the lunar module that put humankind on the moon. Here is why investors should consider venturing into the future with shares in their portfolio.
The space business is thriving
New public space start-ups are very speculative; many have little or no revenue, instead relying on future projections to draw investors to their stock. But Northrop Grumman doesn't have that issue. Its Space Systems segment is already a substantial part of what it does, generating nearly $9 billion in revenue through nine months of 2022, the company's largest division by revenue year to date.
Image source: Northrop Grumman.
The Space Systems segment is also the fastest growing by a wide margin; its $9 billion in revenue year to date is a 13% increase over 2021. Additionally, management recently raised guidance from the high $11 billion range to $12 billion. Northrop Grumman has its hands throughout the space industry; recent business includes government work with the Space Development Agency and rocket booster systems to launch commercial satellites into orbit.
Northrop Grumman's CFO told analysts in a November conference that the space segment will probably continue as the company's fastest-growing segment for the next couple of years. Investors will want to keep a pulse on the space segment, including looking at backlog growth and new projects. Still, it seems clear that Northrop Grumman has a well-established presence in the industry, so investors should benefit as the space industry grows.
Upcoming growth from the B-21
But there's far more to Northrop Grumman than space; the company should experience growth as it produces its newly developed B-21 stealth bomber aircraft. Northrop Grumman was awarded the contract in 2015 and could deliver its first production units to the U.S. Air Force in the mid-2020s. It's a massive program; Bloomberg estimated that the 100 units the Air Force is initially buying could end up costing $203 billion in development, procurement, and service costs over 30 years.
Northrop Grumman has cited analyst estimates that the Air Force could eventually end up purchasing as many as 200 units, giving an idea of how big a deal this type of program could be for the stock. Northrop Grumman could see a spike in revenue as deliveries arrive, followed by years of recurring revenue for service and maintenance.
Given the current estimated delivery timeline, investors may have to wait until 2024 to 2026 to see the financial impact of the B-21 program. However, the expected momentum of the space segment could carry water for Northrop Grumman until that time arrives. The long-term future (five years out and longer) looks bright for the company and its shareholders.
Should investors buy? Or wait for a dip?
The ongoing bear market has created opportunities for many stocks, but Northrop Grumman has outperformed the market over the past year. The stock produced a near 50% gain on a total return basis, which has impacted the stock's valuation.
NOC Total Return Price data by YCharts
Today Northrop Grumman trades at a forward price-to-earnings ratio of 21, noticeably above the stock's 10-year median P/E of 15.5. Analysts expect annual earnings-per-share (EPS) growth averaging just over 3% for the next several years. Growth should pick up as the B-21 program gains steam, but it's hard to call the stock's valuation attractive given the premium demanded for what could be low-single-digit EPS growth.
Perhaps the market is pricing in the future growth opportunities discussed above, but that's pretty far into the future; it's hard to justify chasing stocks in a bear market when other quality assets are on sale. Investors should consider waiting for the stock to cool off a bit or dollar-cost averaging their way very slowly into a position. While the valuation is a bit lofty today, Northrop Grumman is arguably one of the best space stocks you can own over the long term.
