Northrop Grumman's Wise Move to Pick Up Orbital ATK

In this MarketFoolery podcast segment, host Chris Hill and Stock Advisor Canada's Taylor Muckerman discuss the big deal in the aerospace and defense sector: Northrop Grumman's (NOC 2.51%) cash bid for Orbital ATK (OA). The two companies have a lot in common, but their actual products don't have much overlap, which should make this a complementary deal. And in the view of some notable Fools, the space business is a good place to be.

A full transcript follows the video.

This video was recorded on Sept. 18, 2017.

Chris Hill: Northrop Grumman buying Orbital ATK. I always think of it as Orbital Sciences. All-cash deal; pretty significant premium compared to where it closed on Friday. This is an industry that you've looked at before. What did you think when you saw this deal?

Taylor Muckerman: Yeah, you look at about 20% appreciation to the stock price, as you mentioned last week. And I definitely like the deal. It's complementary to what Northrop Grumman already has. Not a lot of overlap here. You're looking at launch vehicles, some rocket technology, and smaller satellites. So definitely accenting what Northrop Grumman already offers in the defense sector, with their larger satellites and their unmanned aircraft and missiles as well. I definitely like the deal, and maybe you can thank Kim Jong-un a little bit for the announcement of this, after launching Labor Day rockets over Japan not too long ago.

Hill: Do you think that's what sped up this deal from Northrop Grumman? Like, "You know what? We need some more of this tech. Let's give the people at Orbital ATK a call."

Muckerman: Well, I mean, you look at Orbital ATK specializing in a lot of anti-missile defense. So certainly, if you can envision the future of war, it seems like that might be pretty important. It's nothing that you ever want to envision, but certainly if you're a public company and that's your line of business, you'd be doing your shareholders a disservice if you weren't envisioning the next five, 10, 20 years down the road.

Hill: I don't know who's on the board of directors at Northrop Grumman, but to your point, this is a situation where you can imagine someone internally, but also someone on the board, calling up the CEO and saying, "By the way, how are we doing in this one particular area? And if we're not where we need to be," as we've talked about from time to time, "if we can't grow ourselves, let's go out and buy some growth."

Muckerman: Yeah, and when you look at what this is, you look at the kind of wars we've been in most recently, ground wars and dealing with navy and aircraft, where the anti-missile defense systems are fairly old in this country, because we're talking about them being built during the Cold War for the same reason that we're talking about it now with North Korea. So you could potentially look at the Republican Party looking to spend some money here in this one particular area, and that happens to be Orbital ATK's bread and butter.

Hill: I have to mention that David Gardner's weekly podcast, Rule Breaker Investing -- which, if you're not listening to that, you absolutely should be clicking the subscribe button over there -- his most recent episode, which was published last Wednesday, was David talking about five stocks that the average investor has probably not heard of or is probably not that familiar with, and these are stocks that David has recommended at various points in his investing life through different services. Orbital ATK was one of them, which he first recommended 10 years ago, when it was $43 a share. Now you look at the buyout price of $134.50 a share -- that's a tidy little 210% gain at a time when the market is up about 70% over the same time period.

Muckerman: He has his ear to the train tracks, always.

Hill: Yeah, absolutely. Although I do like one of the things David said in the episode. David gets this question a lot. I think a lot of analysts get this question, but David definitely does, which is, sort of, "Where do you get your ideas?" And one of the things he mentioned with reference to Orbital ATK was, he said, "I just like space. I'm just interested in outer space," and increasingly there are businesses that are operating that way.

Muckerman: Yeah, and if you think about it, I've been looking at this space recently from a company in Canada out of Vancouver, MacDonald, Dettwiler and Associates. They're hoping to get their shares listed on the New York Stock Exchange sometime in the very near future, so maybe U.S. investors can get access there. But one of the largest, if not the largest satellite manufacturer in the world, just recently started working more and more with the U.S. government, got their clearance. They're building a facility here out in California. So maybe another way for investors in the U.S. to access the satellite market.

But when you look at what Elon Musk and Jeff Bezos are trying to do with these reusable rockets and allowing launches to happen on a weekly basis for much, much cheaper -- Elon Musk wants to reduce the cost of launching into space by multiples of 10, so making it much more feasible to launch satellites on a consistent basis and talk about repairing satellites in space, which is something that both MacDonald Dettwiler and Orbital ATK are trying to do, basically acting as a tow truck to latch on to these satellites and operate on them without even taking them out of orbit. So certainly the next frontier, and billions and billions of dollars are going to be spent there.