Defense stocks RTX (NYSE: RTX) and Northrop Grumman (NYSE: NOC) are facing headwinds, including margin pressures and the impact of government interest in their operations. While share buybacks are largely paused amid this scrutiny and the risk of lost contracts, these concerns may already be priced in, shifting attention to the companies' fundamental growth drivers. They include the need to replenish depleted stockpiles, ongoing conflicts, modernization, and increased government spending, all of which point to multi-year cycles for leading defense original equipment manufacturers (OEMs).
Q3 reports in the defense sector revealed record backlogs. RTX, the larger of the two with a more diversified business, reported $340 billion in backlog, underpinned by a recently awarded Tomahawk missile contract. Northrop’s 1.5x book-to-bill ratio also reflects strong order volume. The takeaway for investors is that these companies have clear visibility into long-term revenue growth and earnings quality, and the potential to resume or accelerate buybacks next year.
