Northrop Grumman Downgraded by RBC on Slower Growth, Cautious Defense Outlook

RBC Capital Markets downgraded Northrop Grumman (NOC) to Sector Perform from Outperform on Friday, citing expectations for slower revenue growth and a more cautious outlook for U.S. defense spending. The firm also significantly reduced its price target on the aerospace and defense contractor's stock to $525 from $640.

Cautious Growth and Spending Forecast

In a note to clients, RBC analyst Ken Herbert projected a best-case scenario of approximately 6% annual revenue growth for Northrop Grumman from 2026 to 2028, a rate the firm considers merely in line with its peers. The analyst stated that the company is "less exposed to international sales," which could limit potential upside.

The downgrade is also rooted in a more guarded view of the broader defense budget environment. RBC's model assumes "low-single-digit real growth" in total defense spending from fiscal 2028 to 2031, warning of a growing risk of certain programs being crowded out.

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Key Program Risks and Opportunities

While the B-21 bomber program is a key future driver, RBC expects it will likely remain a "near-term drag on margins," even as the firm anticipates the program of record will rise to at least 150 aircraft. The note added that other potential growth areas, such as the space portfolio and solid rocket motors, would require additional investment.

RBC also highlighted "incremental risk" to the F-35 program, which accounts for about 10% of Northrop's sales. Furthermore, the analyst noted that limitations on capital allocation could serve as a "headwind for sentiment, and earnings growth."