Al Root

The defense industry is changing -- and booming -- leaving investors wondering how to value the sector. Given all the factors, price/earnings ratios are likely to rise.

Comments from Northrop Grumman CEO Kathy Warden help explain why. At a Citi investment conference, she reviewed most of the trends affecting her company, including higher international military spending, higher scrutiny from the Defense Department, and the need for higher investment to meet growing demand for missiles, interceptors, and unmanned systems.

On balance, things are good. "We are in an unprecedented demand cycle within defense, not just within the United States, but globally," Warden said to Citi analyst John Godyn on Wednesday. "And it appears that this is going to be a sustaining demand signal."

Northrop has important nuclear, missile, and space businesses, positioning it well for new initiatives such as President Donald Trump's Golden Dome defense shield and unmanned collaborative combat aircraft.

There are some concerns, though. Trump has threatened the ability of defense contractors to buy back shares and pay dividends if they don't deliver needed technology on time and on budget. Warden said the president's executive order "very much is aligned" with getting the industry to invest more.

Northrop has paused its share repurchase program, citing better investment opportunities for that cash. It is still committed to the dividend, declaring a $2.31 quarterly payout on Feb. 10. That is the same payment declared in November.

The government has also taken stakes in companies, providing them with the investment funds they need to boost production. The Defense Department holds equity in rare-earth producer MP Materials. It also plans to invest $1 billion in the missile spinoff coming from L3Harris Technologies.

Direct investment in contractors is new for the industry. Capital is welcome, but it raises questions about how the government will treat bids for equipment from companies it owns and those it doesn't.

Godyn asked Warden about the government co-investment strategy. Warden said Northrop is the "best party" to make investments in its missile business, adding it hasn't discussed a stake with the federal government.

"I think you'll see different companies take different approaches to this in different segments of the markets," said Warden, adding that in rocket motors, "there's just a lot of strategic synergy in those parts of our portfolio that we want to maintain an ownership structure of."

She sees potential for the government to examine the supply chain to boost investment. Smaller companies might need a hand.

"Just because we, as a large company, see strategic synergy across the portfolio and are choosing one model doesn't mean that other companies won't choose a different model," said Warden. "We want to make sure the entire ecosystem is healthy and that we can get the supply of materials and parts that we need as well."

The challenges the industry faces haven't derailed the stock. Coming into Thursday trading, Northrop stock was up 67% over the past 12 months, leaving shares trading for about 26 times the earnings expected over the coming 12 months, up from about 15 times a year ago.

That valuation multiple is supported by higher earnings growth estimates. Wall Street expects Northrop earnings to grow about 7% a year on average for the next few years, up from essentially no growth for the past few years.

Those growth estimates have been rising and are likely to keep rising.

Northrop stock was up 0.8% in morning trading, while the S&P 500 and Dow Jones Industrial Average were down about 0.3% and 0.4%.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 19, 2026 11:06 ET (16:06 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.