This Could Be Huge for NOC Stock
Northrop Grumman Corporation (NYSE:NOC), the maker of the stealth bomber, is trading well above $190.00. This is an all-time high for NOC stock.
The GAO (Government Accountability Office) has dismissed a complaint from Boeing Co and Lockheed Martin Corporation over the “LRS-B” (Long-Range Strike Bomber) contract. This lifts any doubt over Northrop Grumman stock’s potential to sustain its current valuation long-term.
“GAO reviewed the challenges to the selection decision raised by Boeing and has found no basis to sustain or uphold the protest,” the GAO states. “In denying Boeing’s protest, GAO concluded that the technical evaluation, and the evaluation of costs, was reasonable, consistent with the terms of the solicitation, and in accordance with procurement laws and regulations.” (Source: “USAF LRS-B Award To Northrop Grumman Is Upheld,” Aviation Week, February 19, 2016.)
In October 2015, Northrop Grumman won a contract to develop the U.S. Air Force’s next strategic long-range bomber. Northrop will build a fleet of 100 aircraft, with an initial operational capability expected for 2025. Northrop’s rivals appealed the award with the GAO on December 18, citing a fallacious process.
Wall Street had already expected Northrop would win the GAO verdict into NOC stock’s financial expectations for the coming year. (Source: Ibid.) Cowen and Co. analysts suggest revenue growth should speed up at least at a five-percent pace in 2017 to 2018.
Boeing and Lockheed could still appeal the decision. Their argument is that the U.S. government has failed to consider proposals to curb spiraling defense program costs. But the chances of stopping NOC stock are slim. The GAO concluded that the technical evaluation and cost assessment for Northrop Grumman’s bid was reasonable and consistent with the terms of the tender and public procurement regulations. The details of the verdict are secret.
The appeal had forced Northrop Grumman to halt development. Now the company can proceed to develop its LRS-B program. The U.S. Air Force wants the new long-range planes to maintain air supremacy in the coming decades. The contract marks an extraordinary result for NOC stock, which already makes the “B-2” bomber.
The new LRS-B will also mark the retirement of the “B-52,” a design from the 1950s that’s still in service, and the “B-1,” which is from the 1980s.
Only those with the right security clearance know the details of the LRS-B project. What is certain is that the project involves stealth technology. It also must have long-range and nuclear warheads and remote-control capability. The plane will serve as the third pillar in the system for launching nuclear warheads. The other pillars are submarines and ballistic missiles based on land.
The stealth aspect is where Northrop Grumman has more experience than any U.S. military contractor. The LRS-B will have to be able to penetrate deep into enemy territory and survive despite the complex environment. Each plane will cost $511 million, but the total value of the contract could reach $80.0 billion.
This decision is a blow for Boeing, whose military activities have suffered from the loss of orders for the “F/A-18” and “F-15.” The production of these aircraft stops in 2017 and 2020, respectively. Boeing is virtually out of the defense business now. The company was hoping for a repeat of its air tankers scenario for the U.S. Army in 2008.
At the time, Boeing saw Northrop Grumman and Airbus take away its 2003 contract to buy 179 planes, valued at some $30.0 billion. Boeing launched a protest campaign, which took on a political (and patriotic) dimension. Finally, it won the contract back in 2011.
Northrop Grumman stock received a “Buy” recommendation from Drexel Hamilton. It set a $211.00 price target on NOC stock, thanks to the Pentagon’s renewed military spending. (Source: “Analysts Actions — Apple, Twitter, Northrop Grumman, Ford and More,” The Street, October 28, 2015.)
The LRS-B contract is estimated to cost about $60.0–$80.0 billion. This should propel Northrop Grumman stock toward a new plateau, beating analysts’ expectations. NOC stock should benefit at first from the fact that the contract has established a first firm order for 21 aircrafts—worth about $11.5 billion.
NOC stockholders should be more than pleased that Northrop has won one of the most important contracts in the history of the U.S. Air Force. The timing is also right, as the United States is engaged in a renewed “Cold War” with Russia, with a new one brewing against China.
The goal for the U.S. administration is to have a bomber able to fly over potential enemies, such as Russia and China, without being detected. These have intensified their anti-air defense and showed greater military ambitions and capabilities. The Russian military campaign against the Islamic State (IS) in Syria has shown just how far its own long-range missile technology has come.