If I asked you which three defense contracts are the most important to Northrop Grumman (NYSE:NOC), what would you say? You'd probably mention its recent Long Range Strike Bomber, or LRSB, win, but beyond that you might not have an answer -- and that's completely understandable.
With literally thousands of defense contracts out there, it can be hard to keep track of which are the most important for each company. But considering these contracts have a fairly significant impact on each company's bottom line, keeping on eye on a company's biggest defense contracts is a wise move. So to help with that, here are the three most important defense contracts currently for Northrop Grumman.
3. Littoral Combat Ship -- Mission Packages (LCS MP)
One of the big draws behind Lockheed Martin's (NYSE:LMT) LCS seaframe is the fact that it's configurable. In other words, depending on the mission, one of several different mission packages can be added to the LCS seaframe (think sensors, weapons, etc.), alleviating the need to build multiple types of more-specialized ships. But, while Lockheed Martin and Austal USA are the prime contractors behind the seaframe, it's Northrop Grumman that is the prime contractor for the Mission Packages. According to the Government Accountability Office, this contract has a total program cost of just over $6.7 billion, making it Northrop Grumman's third-most-important contract.
Lockheed Martin's contract to build the LCS seaframe was a debacle, which resulted in the Navy cutting its planned procurement, but the good news for Northrop Grumman is that it has avoided that level of problems with its part of the LCS, and there has been no reduction in planned Mission Packages procurement. Unfortunately, that doesn't mean that this contract has been free of foibles. Indeed, even though the Navy has accepted delivery of a number of mission packages, these packages have not been fully developed, demonstrated, or integrated with the LCS seaframes, according to the GAO.
In fact, according to the GAO, the Antisubmarine Warfare packages is five tons too heavy, and when it was tested earlier in 2015, the Mine Countermeasures package had reliability issues. This means that the only Northrop Grumman package that had reached initial operational capability at the time of the GAO's reporting was the Surface Warfare package. Consequently, there's still a lot of headway needed for this contract, and investors would do well to keep close tabs on it.
2. MQ-4C Triton Unmanned Aircraft System (MQ-4C Triton)
When it comes to drones, no one beats Northrop Grumman. Thus, it's no surprise that its second-most-important contract is for none other than the MQ-4C Triton UAS, which is an unmanned aircraft that the Navy plans on using for intelligence, surveillance, and reconnaissance (ISR) missions.
Of course, Northrop Grumman's drones are not known for being cheap, and the Triton is no exception. When the GAO assessed the Triton program in early 2015, it reported that the total program cost came to almost $12.8 billion. However, the good news for the company and its investors is that when the GAO assessed the progress of this program, it found that the critical technology was mature, and the system development and design review phases were successful.
In November 2015, the Navy began operational assessment trials of the MQ-4C. If all goes well, the next step will be the MQ-4 Milestone C review and entry into low-rate initial production. However, before you get too comfortable with the progress of this contract, it's important to point out that it's somewhat behind schedule, and problems could be revealed during testing. As such, Northrop Grumman investors should continue to monitor this program.
1. Long Range Strike Bomber (LRSB) $80-plus billion
When it comes to defense contracts and Northrop Grumman, none is as important as the LRSB -- and with an estimated price tag of $80 billion and counting, it's not hard to see why. However, the price tag is not the most important aspect of this contract: It's the fact that winning the contract solidifies the health of Northrop Grumman's most profitable business sector, aerospace systems, and allows it to stay in the game when it comes to fighter aircraft. This is because without the LRSB, Northrop Grumman wouldn't have a prime combat air force contract, which could be a problem for the company moving forward.
Unfortunately, while Northrop Grumman currently holds this contract, defense giants Boeing (NYSE:BA) and Lockheed Martin -- who had teamed up for their proposal in hopes of winning the LRSB award -- are protesting Northrop Grumman's win. As a result, Northrop Grumman is currently "paused" on this contract as everyone awaits the GAO's ruling on whether the Boeing/Lockheed protest has merit. If the GAO finds that it does, it can recommend a recompete, which would restart the entire process. Consequently, this contract is in no way secure. As a Northrop Grumman investor, I'm keeping hawk eyes on the situation, and would advise you to do likewise.
What to watch
The above three defense contracts will have the biggest impacts on Northrop Grumman's bottom line, but that doesn't mean an investor should buy Northrop Grumman's stock based solely on them. As I recently wrote, it's important to look at the overall picture. However, because of their size, keeping an eye on how these contracts are progressing, as well as Northrop Grumman's backlog, will give investors a more informed investing thesis. Moreover, by keeping close tabs on its biggest contracts, Northrop Grumman investors can spot possible trends -- whether they be positive or negative -- before they impact the company's stock price.
Katie Spence owns shares of Northrop Grumman. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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