Three years ago, the U.S. Navy began testing Northrop Grumman's (NYSE:NOC) newest version of the Fire Scout, a helicopter drone derived from the Bell 407 utility helicopter, for use in active naval operations. Now it's time for Northrop Grumman to start cashing in.
What Fire Scout is
Northrop produces two variants of the Fire Scout, the "combat proven" MQ-8B, which has completed more than 15,650 flight hours and flown more than 5,800 sorties for the U.S. Navy and Marines, and the new, larger MQ-8C.
Northrop advertises the MQ-8C as a complement to Sikorsky's MH-60 Seahawk manned helicopter. Whereas the Seahawk is able to fly for four hours before refueling, Northrop says the MQ-8C can remain aloft for "11+" hours at a time. This is, in turn, an improvement over the original MQ-8B, which had a flight endurance time of less than eight hours.
MQ-8C offers other improvements over the original Fire Scout. Whereas MQ-8B boasted a top speed of 85 knots and a payload of 300 lbs, MQ-8C's more robust platform features nearly twice the speed (135 knots) and nearly twice the payload as well -- 500 pounds carried internally, with the ability to carry 2,650 pounds of cargo in a sling underneath the helicopter.
Last we had heard, though, while the MQ-8C had "completed developmental testing" and was "ready to deploy," it had not -- yet.
What Fire Scout costs
That may have changed last week, when the Pentagon's daily digest of contracts awarded confirmed on Friday that the Navy has ordered Northrop to build it "10 Fire Scout MQ-8C unmanned air systems." The contract, which has an August 2019 deadline for completion, is worth $108.1 million to Northrop.
That's a curious price, by the way -- curiously cheap. $108.1 million, divided among 10 units, implies a unit cost of just $10.8 million for each Fire Scout. That's just one-third of what the Navy agreed to pay for a previous lot of eight MQ-8Cs ordered back in April 2012 ($32.8 million per unit). It's barely a quarter of the $41.7 million that the Government Accountability Office estimated for the MQ-8C's unit cost earlier this year.
What it means for investors
For investors, that could be either good news or bad. On the one hand, collecting one-quarter the high estimate on possible revenue on MQ-8C holds the potential to dent Northrop Grumman's profitability going forward. On the other hand, if Northrop can afford to produce this drone for such a low price -- while maintaining its strong 12.8% operating profit margin -- then that's likely to encourage the Navy to buy more Fire Scouts. It might even convince the Navy to expand its purchases past the GAO's current projected "total quantity" of 70 MQ-8Cs to be purchased.
Such a low price might even attract foreign buyers to check out the Fire Scout, expanding sales internationally -- and helping to keep competing drone makers at bay, by underpricing potential rivals.
What remains to be seen is whether the price quoted on the Pentagon's contracts pages is the new "normal" price Northrop will be charging for Fire Scouts going forward, or just a one-time fluke. Trust that we'll be watching carefully for additional sales announcements, and confirming whether this price holds firm going forward.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 283 out of more than 75,000 rated members.
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