Mixed Q2 Ops, But Strong Orders.

Research evidence excerpt

Mixed Q2 Ops, But Strong Orders.

TD Cowen Northrop Grumman

Global Research July 21, 2026

VALUATION METHODOLOGY AND RISKS

Valuation Methodology

Aerospace & Defense Electronics:

Price target methodology: We use a combination of Price-to-earnings (P/E), total enterprise

value to EBITDAP (P = FAS/CAS pension adjustment), free cash flow yield (on stock price), and

cash flow yield. We tend to favor GAAP P/Es for most commercial aerospace companies and

TEV/EBITDAP for defense primes with large defined benefit plans with share Y/Y swings in

FAS/CAS. We also use sum-of-the-parts for companies with sharply disparate businesses of

meaningful size (GD, TXT, SAIC).

We make investment recommendations on certain early stage, pre-revenue companies based

upon an assessment of their business model, technology, probability of market success,

and the potential market opportunity, balanced by an assessment of applicable risks. Such

companies may not be assigned a price target.

Investment Risks

Defense sector risks

· Sequester/reduced DoD funding to adversely impact industry sales with potential program

cutbacks – keyed to potential for federal debt reduction agreement. Short cycle services

contracts will feel pressure before longer cycle weapons systems

· Increased competition & pricing pressures on new contracts, esp. in services sector

· Potential stiffer DoD payment terms

· Possible shift to fixed-price-type development contracts on new programs

· Margin pressure from declining EAC (estimates at completed) adjustments as older contracts

end and revenues decline

· Further decline in interest rates to boost pension expenses

· Transition risks as programs move from development into production

· Relatively low entry barriers in service area and increasing bid protest on ID/IQs pressure