I write a lot about companies that build aircraft. I write a lot about companies that build military equipment. So imagine my surprise when, last week, I learned that one of the companies I follow most actively -- Northrop Grumman (NOC -0.19%) -- may have a military aircraft that's worth up to $100 billion in future revenue.
And it's an aircraft whose development has been kept so secret that I'd almost forgotten it even existed.
Introducing the RQ-180
Rumored for more than a decade, the aircraft in question -- an unpiloted drone called the RQ-180 -- made its first real-world appearance in a single random photo snagged by a freelance photojournalist in California in 2020. Further details on the top-secret drone appeared on Medium.com last year, describing the RQ-180 as the culmination of a 20-year-long U.S. Air Force effort to build a "flying wing" stealth drone that is "invisible to enemy radars, infrared sensors, and acoustic detectors, and [able] to fly at high altitudes and long ranges."
Impressive as that already sounds, here's the real kicker for defense investors: According to a new story from Britain's The Telegraph, the RQ-180 stealth drone could add as much as $100 billion to the $200 billion B-21 bomber contract that Northrop Grumman won in 2015.
How $200 billion becomes $300 billion for Northrop Grumman
How does this math work?
When Northrop Grumman entered its candidate (colloquially known at the time as the "B-3 bomber") to replace the Air Force's current fleet of B-2 stealth bombers, it envisioned the bomber acting in concert with unmanned stealth drones. These drones would range ahead of the bomber at very high altitude, identifying both anti-aircraft defenses to avoid and targets for the bomber to attack from a safe distance.
Thus, the B-21 Raider actually needs to be thought of as just one half (if the more expensive half) of "a stealthy hunter-killer team" (emphasis added).
What this means for Northrop Grumman
Several media outlets confirm that the B-21 Raider will cost approximately $750 million per unit sold. Multiplied by an anticipated 100 to 200 bombers, and factoring in inflation, The Telegraph estimates that the actual cost could approach $200 billion -- the equivalent of five full years of revenue for Northrop Grumman across all its divisions.
But here's the thing: Calculating that the Air Force will need "a couple of dozen RQ-180s" to back up its bombers, The Telegraph argues the actual value of Northrop's contract to build both the B-21 Raiders and the RQ-180 drones to accompany them could add $100 billion (i.e., 2.5 more years' worth of revenue) to Northrop Grumman's top line.
And that estimate may prove conservative. As a more "expendable" vehicle than the piloted B-21, it makes sense that the RQ-180 will be less expensive to manufacture than its piloted partner. And if the drone is both more expendable and cheaper, it makes sense that the Air Force would order more RQ-180s than B-21s -- not fewer. This implies that the revenue opportunity from building RQ-180s might be even greater than what The Telegraph surmises.
Caveats and provisos
Granted, there's always the risk that the B-21 bomber program will get cut short before the Air Force ever buys 100 -- much less 200 -- of the airplanes. Lockheed Martin's F-22 Raptor fighter jet program, for example, famously set a target of 750 airplanes to be produced when its contract was initially awarded in 1991, but cost overruns ended the program prematurely, and ultimately fewer than 200 planes were built.
Or consider the case of Northrop's B-2 Spirit bomber, the plane the B-21 will replace. The Air Force originally asked Northrop to build 132 B-2 bombers, but as costs ran wild, the program was canceled with just 21 aircraft in service. Ultimately, the B-2 ended up costing $2 billion per unit, forever tagging it as the plane that "literally cost its weight in gold."
That should not happen with the B-21, however. Unlike the F-22 and B-2 development programs, which were awarded largely under cost-plus contracts, the B-21 program is fixed-price -- an intentional move on the Pentagon's part to prevent the kinds of cost overruns that have terminated other weapons programs prematurely. On the one hand, this has caused Northrop Grumman to incur sizable losses on its first batch of planes built for the Air Force. On the other hand, it may help to ensure that all of the originally desired planes actually end up getting built because the government won't have to worry about costs ballooning over time.
Early losses on this contract, due to its fixed-price nature, will certainly sting investors in the short term. But in the longer term, the more planes Northrop ends up building, the more time it will have to make back those early losses -- both from B-21 sales and the RQ-180. Additionally, the more planes that are ultimately built, the more money Northrop should make from servicing, maintaining, and upgrading these planes as well.
How much money will Northrop end up getting? This remains to be seen. But according to S&P Global Market Intelligence, the company's revenue in 2023 was just under $40 billion. If $300 billion is just the starting point for revenue estimates from the B-21 and RQ-180 programs, I'd say Northrop is off to a very good start.
