# Northrop Grumman Corp. (NYSE:NOC)

## Present Value of Free Cash Flow to Equity (FCFE)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

### Intrinsic Stock Value (Valuation Summary)

Northrop Grumman Corp., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 9.03%
01 FCFE0 1,466
1 FCFE1 1,881 = 1,466 × (1 + 28.28%) 1,725
2 FCFE2 2,311 = 1,881 × (1 + 22.88%) 1,944
3 FCFE3 2,715 = 2,311 × (1 + 17.49%) 2,095
4 FCFE4 3,043 = 2,715 × (1 + 12.09%) 2,153
5 FCFE5 3,247 = 3,043 × (1 + 6.70%) 2,107
5 Terminal value (TV5) 148,377 = 3,247 × (1 + 6.70%) ÷ (9.03%6.70%) 96,284
Intrinsic value of Northrop Grumman Corp. common stock 106,308

Intrinsic value of Northrop Grumman Corp. common stock (per share) \$694.58
Current share price \$437.65

Based on: 10-K (reporting date: 2022-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 3.72% Expected rate of return on market portfolio2 E(RM) 12.62% Systematic risk of Northrop Grumman Corp. common stock βNOC 0.60 Required rate of return on Northrop Grumman Corp. common stock3 rNOC 9.03%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rNOC = RF + βNOC [E(RM) – RF]
= 3.72% + 0.60 [12.62%3.72%]
= 9.03%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

Northrop Grumman Corp., PRAT model

Average Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Dec 31, 2018
Selected Financial Data (US\$ in millions)
Dividends declared 1,052 989 951 880 822
Net earnings 4,896 7,005 3,189 2,248 3,229
Sales 36,602 35,667 36,799 33,841 30,095
Total assets 43,755 42,579 44,469 41,089 37,653
Shareholders’ equity 15,312 12,926 10,579 8,819 8,187
Financial Ratios
Retention rate1 0.79 0.86 0.70 0.61 0.75
Profit margin2 13.38% 19.64% 8.67% 6.64% 10.73%
Asset turnover3 0.84 0.84 0.83 0.82 0.80
Financial leverage4 2.86 3.29 4.20 4.66 4.60
Averages
Retention rate 0.74
Profit margin 11.81%
Asset turnover 0.82
Financial leverage 3.92

FCFE growth rate (g)5 28.28%

Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).

2022 Calculations

1 Retention rate = (Net earnings – Dividends declared) ÷ Net earnings
= (4,8961,052) ÷ 4,896
= 0.79

2 Profit margin = 100 × Net earnings ÷ Sales
= 100 × 4,896 ÷ 36,602
= 13.38%

3 Asset turnover = Sales ÷ Total assets
= 36,602 ÷ 43,755
= 0.84

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 43,755 ÷ 15,312
= 2.86

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.74 × 11.81% × 0.82 × 3.92
= 28.28%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (66,984 × 9.03%1,466) ÷ (66,984 + 1,466)
= 6.70%

where:
Equity market value0 = current market value of Northrop Grumman Corp. common stock (US\$ in millions)
FCFE0 = the last year Northrop Grumman Corp. free cash flow to equity (US\$ in millions)
r = required rate of return on Northrop Grumman Corp. common stock

#### FCFE growth rate (g) forecast

Northrop Grumman Corp., H-model

Year Value gt
1 g1 28.28%
2 g2 22.88%
3 g3 17.49%
4 g4 12.09%
5 and thereafter g5 6.70%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 28.28% + (6.70%28.28%) × (2 – 1) ÷ (5 – 1)
= 22.88%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 28.28% + (6.70%28.28%) × (3 – 1) ÷ (5 – 1)
= 17.49%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 28.28% + (6.70%28.28%) × (4 – 1) ÷ (5 – 1)
= 12.09%