Northrop Wins Defense Deals - Analyst Blog

Defense major Northrop Grumman Corp. NOC received back-to-back contracts from Pentagon's funding list of Apr 2, 2014, fetching $141.8 million in total.

The largest contract worth $98.0 million is an indefinite-delivery/indefinite-quantity, cost-plus-incentive-fee award. The contract calls for Northrop to carry out maintenance service of the Global Adaptive Planning Collaborative Information Environment (GAP CIE) software system for the U.S. Air Force.

The contract includes the supply of software deliveries for sustainment, enhancement and modification to fielded GAP CIE capabilities. The company will also continue to integrate tools to support the production of assigned campaign/contingency plans and orders, Unified Command Plan taskings, and Guidance for the Employment of the Force-assigned tasks. Work on this contract is expected to be completed on April 30, 2019.

The second contract is a $43.8 million worth modification contract for the production and delivery of 5 MQ-8 Firescout vertical take-off and landing tactical unmanned aerial vehicles (VTUAV). The contact also includes one ground control station in support of the VTUAV endurance upgrade rapid deployment capability effort. This contract is slated for completion by the end of 2015.

Although the threat from sequestration remains for periods beyond fiscal 2015 and casts a shadow of uncertainty on long-term funding, these small ticket contracts at regular intervals provides some relief and ensures a steady revenue stream.

Northrop's top- and bottom-line results succeeded in beating the Zacks Consensus Estimate in the fourth quarter 2013 driven by its strong operational performance. The earnings beat was attributable to a lower share count and strong operating performance. However, the bottom line came in below the year-ago figure by 2.9% mainly due to lower revenue generation.

In this context, it is worth mentioning, that Northrop's total order backlog as of Dec 31, 2013, was $37,033 million, down from $40,809 million as of Dec 31, 2012. The decline in backlog reflects a cautious stance on the part of customers in response to the current U.S. government budget environment.

Hence, an uncertain and constrained domestic budget environment has definitely cast a pall of gloom for the defense behemoths. That said, in January, the passing of Obama's $1.1 trillion Omnibus spending measure allows Pentagon to utilize as much as $93 billion for buying weapons and another $63 billion for advancing research and development in the sector.

Again, a steady flow of contracts, which also include substantial international orders, a funded backlog of $22.5 billion as of Dec 31, 2013, the introduction of new products, and the commitment to return wealth to its shareholders make this Zacks Rank #2 (Buy) stock attractive.

Other well-placed players in the aerospace and defense industry include Huntington Ingalls Industries, Inc. HII, Wesco Aircraft Holdings, Inc. WAIR and Embraer SA ERJ. Huntington Ingalls and Wesco Aircraft carry a Zacks Rank #1 (Strong Buy) while Embraer holds a Zacks Rank #2 (Buy).