B-2 Bomber Contract Could Be Big Catalyst for Northrop Grumman Stock
Northrop Grumman Corporation (NYSE:NOC) is developing the next generation stealth bomber (NGB), the so-called Long Range Strike Bomber or LRS-B, for the U.S. Air Force (USAF). After a hard competition of four years, the Pentagon ended the suspense last night. Not surprisingly, NOC stock received a “Buy” recommendation from Drexel Hamilton, which set a $211.00 price target thanks to the Pentagon’s renewed military spending, as well as the new stealth bomber win. (Source: “Analysts Actions — Apple, Twitter, Northrop Grumman, Ford and More,” The Street, Oct. 28, 2015.)
In expectation of the news, over the past few weeks, Northrop Grumman stock has shot upwards from a plateau of $170.00 to $180.00, where it has been gliding for at least a year. The new stealth bomber program, estimated to cost about $60.0 to $80.0 billion, should easily push Northrop Grumman stock toward a new plateau that may well exceed analysts’ expectations.
Based on the defined requirements, the average unit acquisition cost per aircraft will be $550 million (2010) for a total expected acquisition of 100 LRS- B aircraft, according to the Pentagon. Northrop Grumman stock should benefit at first from the fact that the contract has established a first firm order for 21 aircraft. At the 2010 price, that’s an appetizer worth about $11.5 billion alone. In fact, the initial contract stands at $21.4 billion because of initial development expenses, while widely expected to increase to a total of $80.0 billion.
Northrop, which designed the current B-2 stealth bomber, beat Lockheed Martin Corporation (NYSE:LMT) and The Boeing Company (NYSE:BA), which were planning to work together on the project. NOC stockholders should be more than pleased that Northrop has won what is considered to be one of the most important contracts in the history of the U.S. Air Force at a time when the United States is engaged in a renewed “Cold War” with Russia.
Indeed, while Boeing and Lockheed Martin may have lost this contract, there will be many others in the near future as the Pentagon prepares the next generation of military platforms to deal with Russia’s revitalized military and the merging China, which desires military and geopolitical might as well as economic.
Will This Lift NOC Stock?
For Northrop, the development of the next bomber will be followed by the acquisition of 100 aircraft. Depending on where the geopolitical winds blow, that number may be revised upwards. This is because the U.S. bomber fleet, apart from the B-2, has become rather dated, if not outright redundant, considering that just under half the 160 strategic bombers in service were designed in the 1950s.
The LRS-B’s mission is to replace the fleet of B1-B and above all the B-52s. The LRS-B will have to have remote control capability and be able to deploy conventional and nuclear warheads. The aircraft will serve as the third pillar in the system for launching nuclear warheads beside submarines and ballistic missiles based on land.
The Stealth aspect, where Northrop Grumman has more experience than any U.S. military contractor, means that the LRS-B will have to be able to penetrate deep into enemy territory with high survivability capabilities in a complex environment.
Boeing designed the iconic B-52, after all, and several other historic U.S. bombers like the B-29, one of which dropped the atomic bomb on Hiroshima. Yet Boeing, which will stop making the F-15 and F-18 fighter jets, has several hundred new airliners to build and deliver. Boeing stock should not even flinch, considering the value of its backlog.
As for Lockheed Martin, it is in charge of the JSF F-35, which is just starting to demonstrate its potential as the marketing campaign intensifies in direct proportion to intensifying geopolitical pressure. The first new generation bombers should come into service in 2025.
The goal for the U.S. administration is “to have a bomber able to fly over countries potentially harmless enemies such as Russia and China, which have recently developed new capacity” of anti-air defense and showed greater military ambitions and capabilities. The project was canceled in 2009 and then reconsidered later because the Pentagon considers it more effective against long-range cruise missiles. The Russian military campaign against Islamic State (IS) in Syria has shown just how far their own long-range missile technology has come.
Here’s the Bottom Line on Northrop Grumman Stock
Northrop Grumman recorded a net profit of over $516 million in the third quarter, up nine percent year-on-year to $2.75 per share. (Source: “Northrop third-quarter results beat forecasts, 2016 profit outlook raised,” Reuters, Oct. 28, 2015). Adjusted for exceptional items, earnings per share amounted to $2.41, higher than the $2.21 per share by analysts polled by Zacks Investment Research. The group also saw its revenues settle at $5.97 billion against $5.98 billion a year earlier during the same period. The consensus was $5.84 billion.
In addition, Northrop Grumman raised its forecast of earnings per share for 2015 from $9.70 to $9.80, against a previous estimate of $9.55 to $9.70 per share. The revenue guidance has been refined to $23.6 to $23.8 billion from $23.4 billion to $23.8 billion previously.