What's the best way to win a government contract? If you ask Northrop Grumman (NYSE:NOC), they might tell you: Make sure you're the only company able to bid!

As you may recall, roughly two years ago NASA announced plans to award Northrop Grumman a sole-source contract to build a "Minimal Habitation Module" that astronauts would live in while aboard the planned Lunar Gateway space station. At the time, it wasn't clear quite how much this contract would be worth to Northrop -- I estimated $339 million. But it seems I was off in my estimate.

Way off.

The correct figure, as it turns out, is three times as large.

Artist's depiction of the Lunar Gateway Habitation and Logistics Outpost.

Image source: NASA.

Anatomy of a sweetheart deal

The fact that Northrop wouldn't have to compete with any other companies to build the habitat module already suggested that this would be a pretty profitable contract for the company. We got our first inkling of just how profitable it might be for the company last year, when NASA officially confirmed that Northrop would receive the contract to build the habitation module -- now dubbed the Habitation And Logistics Outpost, or HALO -- and would be paid an initial $187 million just to design the module.

Last week the other shoe dropped when NASA announced it would award Northrop an additional "firm, fixed-price contract" to build and test the HALO for $935 million. And to be clear, this is on top of the $187 million already awarded. 

The result: The total value of HALO to Northrop has already topped $1.1 billion -- three times my initial best guess.

What $1.1 billion buys

So what will NASA get for its money?

"Derived from Northrop Grumman's highly successful Cygnus spacecraft" (says Northrop), HALO will offer living space similar to the cargo capacity of the Cygnus -- about 19 cubic meters, or roughly the size of a "small studio apartment," says NASA. As the "hub" for the entire Lunar Gateway, HALO will include living quarters sufficient to house four astronauts for 30 days at a time, command and control systems, and three docking ports spacecraft can connect to, or which NASA might in the future attach additional modules to -- perhaps also built by Northrop.   

But first Northrop Grumman must build the HALO, then attach it to the Lunar Gateway Power and Propulsion Element being built by Maxar Technologies (NYSE:MAXR), then test that the two elements function properly together. Northrop will then prepare the assembled space station for launch by SpaceX, atop a Falcon Heavy rocket due to launch in November 2024. (If you recall, it was this tight deadline for getting astronauts back to the moon by 2024 -- instead of 2028 as initially envisioned -- that motivated NASA to award the HALO contract to Northrop "sole-source" in the first place.) 

What it means to Northrop Grumman investors

Of course, no matter how Northrop got the contract, the important thing now is that Northrop has got it -- and the $1.1 billion in revenue that goes with it.

How much is this worth to Northrop and its shareholders, in dollars and cents of profit? At a bare minimum, I think investors can probably count on Northrop earning at least the 10.2% operating profit margin that S&P Global Market Intelligence data shows its Space Systems business earned last year. Given the sole-source nature of the work, and the fact that Northrop is charging in excess of three times the cost of a basic Cygnus spacecraft for HALO, I wouldn't be surprised to see operating margins closer to the 10.7% Northrop earned in 2019, the 11% it earned in 2018 -- or even higher.

Ballpark it at the 11% level, though, and Northrop shareholders can probably expect this single contract to yield operating profit of at least $120 million for the company -- or about $0.75 per share. Over the next three years, that should work out to roughly 1% in additional earnings growth for Northrop, per year, over and above what it would have earned without the HALO work.

That's a nice windfall for Northrop, and a nice consolation prize after NASA cut Northrop's OmegA rocket from the competition to launch its satellite missions earlier this year. Going forward, the future of Northrop's lucrative space business will probably depend largely on the company's ability to win work building space infrastructure contracts such as the HALO deal.

The biggest risk for investors: Most of those contracts probably won't be sole-source.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.