Northrop Grumman Corp. (NYSE: NOC) is known in the defense industry as a leading global security company specializing in autonomous systems, cybersecurity, logistics and modernization. While the COVID-19 pandemic is ravaging the global economy, tensions are rising, and this could prove to be fruitful for this defense stock.
The Dow Jones industrial average, S&P 500 and Nasdaq have all pulled back sharply from their all-time highs in late-February. The major averages are down about 26% from their highs. Northrop Grumman stock is down only 16% from its peak in February.
As investors have been looking for more yield and defensive names, they may find that in defense contractors like Northrop Grumman.
War Never Goes Out of Style
According to the Stockholm International Peace Research Institute, $1.8 trillion was spent on weapons in 2018. This was a 2.6% increase year over year. The five biggest spenders that year were the United States, China, Saudi Arabia, India and France, which together racked up 60% of global military spending for the year.
Military spending in China rose for the 24th year in a row. While overall military spending in the United States is down compared to a decade prior, due largely to the conclusion and de-escalation of two of the most expensive wars in its history, U.S. military spending increased for the first time in seven years.
Total global military spending rose for the second consecutive year in 2018, to the highest level since 1988, the first year for which consistent global data is available. World spending is now 76% higher than the post-Cold-War low in 1998.
In 2018, the United States and China accounted for half of the world’s military spending. The higher level of world military expenditure in 2018 is mainly the result of significant increases in spending by these two countries alone.
It’s worth pointing out here that Northrop Grumman’s biggest customer is the United States government. With a $1.8 trillion market globally, it’s hard to see that this company would be left wanting, at least anytime soon.
What Does Northrop Grumman Do?
Northrop Grumman has five different business segments. The operations are divided into: Air, Cyber, Land, Sea and Space. Across these segments, the company offers myriad product and service lines to customers, and it has even more projects in the works.
The staples of the Air division are the B-2 Spirit and B-21 Raider stealth bombers and the X-47B unmanned attack plane. Northrop Grumman also builds and offers radar and navigation systems.
The Sea division focuses on naval systems, including wet-end sensors, signal processing and complete anti-submarine warfare systems.
For the big picture, the Land division focuses on weapons, mobile command centers and GPS-guided weapons. Specifically, the company specializes in aircraft protection, armaments and ammunition, ground-based strategic deterrent and intercontinental ballistic missile systems, logistics and fleet operations, missile defense and more.
The Cyber division is focused on the digital battlefield, while the Space division focuses on space observations and military space systems.
Troubling Times
The advent of COVID-19 could prove to be a net positive for Northrop Grumman, despite the stock price pulling back in response. This company is one of many defensive stocks, and in times like this investors look for safe haven in industries like defense or consumer goods. This is one reason why Northrop Grumman’s stock has not dropped as much in response.
So when a rising tide in the markets comes to lift all ships, Northrop Grumman stock will have a shorter trip back to even and then on to gains.
Global tensions are mounting, not just as a result of COVID-19, but the price of oil has been a point of contention for many producers across the globe. Saudi Arabia and Russia are at the heart of this conflict and are already in a price war. Concerns are that this could overflow into an actual conflict.
When asking the barber if you need a haircut, the answer is predictable because he’s selling the service. Northrop Grumman has to feel a little like the barber in this case as global tensions rise.
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