Aerospace & Defense

Northrop Stock Shows Promise on New Weapons Sales

Northrop Grumman Corp. (NYSE: NOC) is among the largest manufacturers of weapons systems in the world. It ranks number five on the list of the 20 companies profiting most from war. Arms sales are over 90% of its revenue.

Shares of Northrop Grumman are up 105% over the past five years, against an overall market gain of 45% for the S&P 500. Defense stocks in general have done well. This is because sales of arms have done well both in the United States and overseas.

Some nations have accelerated weapon purchases rapidly in the past decade. The U.S. defense budget is also up by a health margin during that period.

What Northrop Grumman Does

The company divides itself into five business lines: air, land, sea, space and cyber. Within these, the company makes some of the most sophisticated weapons systems in the world. These include high-end radar, the B-2 Stealth Bomber, the E-2C Hawkeye 2000 (which is used for air surveillance), F-35 Lightning II fighter, national security satellites and parts of the systems for the Army’s UH-60L Black Hawk helicopters.

Some of these systems are extremely expensive. The cost of the B-2 bomber has been estimated at $929 million per aircraft. The F-35’s price is estimated at $89 million per plane.

Competitors

Northrop Grumman has very few competitors its size. According to a study by 24/7 Wall St., these include the largest defense contractor, Lockheed Martin Corp. (NYSE: LMT), and the defense operations of Boeing, Raytheon, BEA Systems and General Dynamics.

These companies and smaller competitors have a huge pie from which to take business. Total arms sales among the world’s 100 largest defense contractors topped $398 billion in 2017, after climbing for the third consecutive year. This figure comes from the Stockholm International Peace Research Institute.

Several nations make up most of the demand served by the largest defense companies. In 2017, the defense expenditures of the United States were $610.0 billion, followed by China at $228.0 billion, Saudi Arabia at $69.4 billion, Russia at $66.3 billion and India at $63.9 billion. Although obviously China and Russia are not customers, Northrop Grumman does have a number of customers in North America, Europe, Asia and Africa.

Northrop Grumman Financials

In 2019, Northrop Grumman had total revenue of $33.8 billion, up 12% from the year before. Net income fell 30% to $2.2 billion.

The company’s Mission Systems segment did the best. Revenue rose 5% to $12.2 billion. Operating income was higher by 8% to $1.6 billion.

The company posted strong guidance. It forecast 2020 revenue at between $35.3 billion and $35.8 billion. Kathy Warden, board chair, chief executive officer and president, commented: “With our diverse portfolio, we are positioned to meet our customers’ current and emerging needs.”

Longer term, Northrup’s revenue has risen for several years, from $25.8 billion in 2017 to $30.1 billion in 2018 and $33.8 billion last year.

Management and the Board

According to the most recent proxy, Northrop Grumman has 13 board members, including Warden. Because she holds both the board chair and CEO roles, the company has a lead independent director, Donald E. Felsinger. He is the retired board chair and chief executive of Sempra Energy.

The base compensation for directors is just above $300,000.

Warden became CEO in 2018. Her predecessor, Wesley G. Bush, made $24.1 million in 2018. Warden made $13.3 million. Chief Financial Officer Kenneth L. Bedingfield made $5.9 million.

Although Northrop Grumman management is not among the highest paid in America’s large companies, the compensation is considered generous.

Near-Term Future

Northrop Grumman has two major advantages. The first is that the market for weapons systems continues to grow. Its battle is not for a modest market; it is for market share.

Northrop Grumman’s contract for the B-21 bomber, for example, is worth $80 billion. While this figure is unusually high, it is not unusual for weapons system contracts to be well into the billions of dollars.

Northrop Grumman also has what analysts call a “wide moat.” Because of expertise built up over decades and long-term relationships with the U.S. government and allies, it is impossible for all but a few companies to compete for any single large piece of business.

If Northrop Grumman gets what it certainly believes is its fair share of the sector, it will continue to have revenue at or above the $30 billion level and, at the level, very high margins.