I am retired and take educated guesses on all things financial.

March 04, 2008

March 4, 2008: Northrup Grumman: In Defense

The big fight over the next few weeks will be the USAF decision to award a potential $35b contract to a consortium of companies led by Northrup-Grumman (NOC) and Airbus to build the next generation of vital air refueling tanker aircraft. Tanker aircraft allow our airborne assets to be utilized worldwide. Tanker aircraft also take the politics out of landing rights - unfortunately, they do not take the politics out of Washington. There is an outcry from the usual political suspects - especially in Washington State and Kansas, that appear to view the military as a jobs program instead of procurement of defense assets of the highest quality at the best price. Granted that the "best price" at times becomes a cost overrun embarrassment, in this case, the decision by the Air Force was both prudent and in keeping with their military procurement guidelines. The fact the Boeing (the loser) tried to juice contracts to the USAF on this program and others over the years was not taken into consideration - but should have been, which would have made the decision even more decisive.In an obvious slap at the politicians,Pentagon acquisition officer John Young said that the Air Force followed the bidding rules carefully and there was no obvious reason to protest the contract." An independent team of Pentagon civilian and military experts tracked every step of the process". The NOC-Airbus consortium proposal was judged to be a superior acquisition in almost every respect. The fact that Boeing tried to use the 767 instead of the 777 fuselage in their proposal was viewed as a poor choice, as the USAF was interested in quantity of fuel to be transported, not just a small measure of fuel efficiency from the smaller aircraft.

The fact is, NOC will be building the plane in Alabama and will create 25,000 jobs in the United States during the production of this aircraft. Companies such as EADS North America, General Electric Aviation, Sargent Fletcher, Honeywell, Parker, AAR Cargo Systems, Telephonics, Knight Aerospace and others in the US will benefit.

Although this is a big win for NOC, I believe that Northrup Grumman, currently priced at $80.25 per share (with a 52 week range of $71.31-$86.21) is a $100.00 stock based upon its many other facets. With a market cap of $27.1b, this company is a well-respected producer in command and control systems, large scale intelligence information systems, missile defense systems, advanced radar systems, civilian government and public safety information systems,conventional and nuclear powered naval ships (like the recently launched "New York" made of steel from the Word Trade Center), satellites for a wide variety of missions, system sustainment, logistics support and training, high energy laser systems, health information systems and unmanned aerial vehicles. NOC is one of the very best defense contractors and is on the leading edge of military systems to protect our country and our friends worldwide.

It is my view that regardless of what party wins the White House, aero defense will command a top priority as adversaries such as China and fanatic minions with access to ever more compact and powerful weapons and WMDs ramp up for power politics not too far into this century. NOC will reward our country and its shareholders with steady profits, earned from a job well done.


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