Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Northrop Wins the Dogfight

And so it ends.

After months of waiting to learn who won the dogfight between Boeing (NYSE: BA  ) and Northrop Grumman (NYSE: NOC  ) , the news broke Friday evening -- and it was a win for the underdog Northrop.

According to the press release, the U.S. military preferred Northrop's modified Airbus 330 tanker (called KC-30 in the bidding, but henceforth designated the "KC-45A") to Boeing's KC-767AT. While the Pentagon didn't specify why it preferred Northrop's offering, it called the KC-30 "clearly ... the best value to the government."

We do know that the KC-30 will be able to carry more fuel and cargo than its rival. And while Boeing's spin machine asserted that the KC-767AT would burn 24% less fuel than the KC-30, and cost 22% less to maintain, I pointed out back in January that the fuel efficiency argument in particular looked like a red herring. The KC-30 will be a bigger plane than the KC-767AT would have been. Naturally, it would burn more fuel on a per-plane basis. The real question should have been whether it would be more efficient (on a per-gallon-delivered) basis in carrying fuel to the combat aircraft it tends -- and apparently, the Pentagon answered that question in the affirmative.

Investing in the winner
None of that pertains to the central question for investors: What do we do now that we know the winner? Mr. Market seems to be buying Northrop and selling Boeing. That sounds logical. After all, Northrop just landed a contract that could boost its annual revenue by as much as 10%. In contrast, Boeing lost a potential 5% boost to annual revenue, and it faces the additional misfortune of knowing that once KC-45As start rolling onto the runway in 2013, the Boeing KC-135 that they replace will begin phasing out of service -- costing Boeing maintenance revenue.

An illogical answer
But for my part, the better answer today is: Buy both Boeing and Northrop. The way I look at it, both of these stocks look underpriced today. Contract winner Northrop sells for 12 times its trailing free cash flow, and analysts believe it will grow profits at about 15% per year over the next five years. (Whether they're factoring Friday's contract win into that growth rate yet, I don't know -- but if they aren't, the case for owning Northrop gets that much stronger.) Meanwhile, Boeing may have lost a contract, but its stock looks like a winner to me. Selling for just eight times free cash flow today, and expected to grow at 14% long-term, Boeing's shares trade for an even steeper discount than Northrop's.

As for the companies that joined Northop's winning bid -- including EADS, GE (NYSE: GE  ) , Honeywell (NYSE: HON  ) , and AAR (NYSE: AIR  ) -- I haven't run the valuations on these yet, but you might want to. Could be you'll find another stealth bargain or two among them.

Read up on the history of the KC-X Tanker program in:

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 589835, ~/Articles/ArticleHandler.aspx, 10/25/2016 12:02:22 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,181.15 -41.88 -0.23%
S&P 500 2,145.15 -6.18 -0.29%
NASD 5,288.97 -20.86 -0.39%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 11:46 AM
BA $138.50 Up +1.05 +0.76%
Boeing CAPS Rating: ****
NOC $218.44 Up +1.98 +0.92%
Northrop Grumman CAPS Rating: ****
AIR $31.80 Down -0.09 -0.28%
AAR CAPS Rating: *****
GE $28.78 Down -0.14 -0.49%
General Electric CAPS Rating: ****
HON $108.83 Down -0.43 -0.39%
Honeywell Internat… CAPS Rating: ****