Northrop Grumman (NOC) Wins $475M Contract To Upgrade BMDS

Northrop Grumman Corp.’s (NYSE:NOC) subsidiary unit, Northrop Grumman Systems Corp., recently secured a contract with a maximum ceiling value worth $475 million from the Missile Defense Agency, Huntsville, AL. Work related to this deal will involve development, integration, testing and fielding of complex advanced discrimination techniques and sustainment of complex modeling and simulation techniques and tools used to model Ballistic Missile Defense Systems (“BMDS”) capabilities.

Details of the Deal

Per the deal, the company will develop advanced discrimination algorithms for the first time along with some highly complex software and tests. The entire contract has been divided into two task orders wherein approximately $9.9 million will be used for program management and another $143 million for the development of BMDS.

The work will be carried out in Huntsville, AL; Colorado Springs, CO; Boulder, CO; and Azusa, CA. Ordering period for the deal is from Mar 2, 2018 through Mar 2, 2023.

Northrop Grumman will utilize fiscal 2018 research, development, test and evaluation funds to complete the task.

Northrop’s Role in BMDS

Of late, terrorist groups have been increasingly using cheap yet deadly man-portable missiles. Thus, an effective anti-missile solution for the protection against such threats is the need of the hour. A well- equipped nation like the United States will thus always want to remain prepared for sudden attacks.

Realizing the rapidly expanding market for missile defense, major players like Northrop Grumman in the aerospace-defense space are increasing their focus on developing state-of-the-art missiles. In sync with this, Northrop Grumman’s Intercontinental Ballistic Missile-Minuteman-III holds immense importance, which was first deployed in 1970. Today, various modernization programs have extended this weapon’s operational life beyond 2030.

Along with United States, other powerful nations across the globe are also expanding their missile strength. As a result of this, the global rocket and missile market is projected to grow at a CAGR of 4.74% during 2017-2022 to reach a value of $70 billion by 2022 (per Markets and Markets research firm).

In fact to make most from the current situation, Northrop Grumman announced last September that it has settled the deal for acquisition of missile-maker Orbital ATK (NYSE:OA) for $9.2 billion. With this buyout, Northrop Grumman will benefit from the Orbital ATK's rocket motors, missiles and electro-optical countermeasure product lines.

Further, in February 2018, the $716-billion proposal made by President Trump for the fiscal 2019 defense policy bill is anticipated to boost the defense industry. We believe this budget scenario in the United States as well as the growth prospect for the global missile market, along with frequent contract wins like the latest one, will enable Northrop Grumman to remain one of the major defense players in the market.

Price Performance

Shares of Northrop Grumman have rallied about 42% in a year, compared with the broader industry’s gain of 48.7%. The underperformance may have been caused by intense competition that the company faces in both domestic and international markets.

Zacks Rank & Key Picks

Northrop Grumman carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same sector are Boeing (NYSE:BA) and Huntington Ingalls (NYSE:HII) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boeing posted an average positive earnings surprise of 20.69% for the past four quarters. The Zacks Consensus Estimate for first-quarter 2018 earnings rose by $2.99 over the last 90 days.

Huntington Ingalls recorded an average positive earnings surprise of 3.85% for the last four quarters. The Zacks Consensus Estimate for first quarter 2018 earnings has risen by $5.29 in the past 90 days.

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