Thirteen years ago, military aerospace and shipbuilding giant Northrop Grumman (NOC -0.19%) made the strategic decision to jettison its shipbuilding unit and focus its business on aerospace instead. At the time of the spinoff, the rejected unit, Huntington Ingalls (HII -0.73%), was valued at approximately $2.5 billion in market capitalization, leaving the rest of Northrop Grumman with about a $14 billion market cap.
Today, Northrop Grumman is a $70 billion defense business worth five times its price 13 years ago. Huntington Ingalls stock has performed well too, but is up a bit less than 5x in value. Looked at that way, maybe Northrop Grumman didn't necessarily need to spin off its shipbuilding unit, but at least it didn't suffer from the decision. And Northrop may even have performed a bit better without its shipbuilding business than it would have, with it.
So why is Northrop Grumman trying to get back into the military shipbuilding business today?
Northrop Grumman: Navy drone-driver
That's exactly what Northrop seems to be doing. In a widely publicized announcement earlier this month (curiously widely publicized for what you'd expect to be a secret project), the U.S. Defense Advanced Research Projects Agency announced that Northrop Grumman has just completed full-scale sea trials of a new large drone submarine, built for DARPA and dubbed the "Manta Ray."
Shaped like its namesake, a manta ray with an oval body and two outstretched fins, the Manta Ray appears to measure roughly 40' at its widest point by 40' at its longest. DARPA describes the vessel as "a new class of long-duration, long-range, payload-capable UUVs" and equipped with "several payload bays of multiple sizes and types to enable a wide variety of naval mission sets."
It does not say what those missions will be.
Northrop Grumman itself, however, drops a hint, saying that Manta Ray will operate "in ocean environments where humans can't go," which seems to suggest the vessel is designed for deep-sea operations. Indeed, Northrop notes that Manta Ray is an energy-efficient vessel, able "to anchor to the seafloor and hibernate in a low-power state."
Some media commentators have suggested the Manta Ray may be designed to sit dormant and undetectable on deep sea floors until activated and given a mission. Others are more specific, saying Manta Ray's stealthy design and long endurance make it purpose-built to "scour the seas for Russian and Chinese submarines."
What's in this for Northrop Grumman?
Assuming these guesses are accurate, it's clear why the U.S. Navy might want a few Manta Rays in its fleet and why DARPA has been enlisted to recruit defense contractors like Northrop to build them. (In addition to Northrop, privately held PacMar Technologies has also won a contract to build its own Manta Ray for $55 million).
What's less clear is why Northrop Grumman is diving back into naval waters, and for such a paltry sum. Assuming Northrop also got $55 million for its Manta Ray, that would amount to barely 0.1% of the $40 billion in contracts that Northrop rakes in in any given year, according to data from S&P Global Market Intelligence.
So why change tack now?
Thirteen years ago, Northrop Grumman apparently decided that military shipbuilding wasn't a profitable enough endeavor and that its time would be better spent focusing on building airplanes. In recent years, the company has diversified further into space systems, acquiring one rocket maker (Orbital ATK) and partnering with another (Firefly Aerospace), and generally doing pretty well for itself.
The company did hit something of a rough spot last year when cost overruns in the development of its new B-21 stealth bomber for the Air Force pushed its aeronautics division into an operating loss. But even so, the rest of Northrop's businesses helped to smooth out the losses, and Northrop ended 2023 with a respectable $2.1 billion profit.
Pick a lane, Northrop Grumman
The problem with Northrop, it seems to me, is that whenever one of its business units starts to enter a rough patch, management overreacts and lurches in a new direction. Thirteen years ago, it made the decision to toss Huntington Ingalls overboard as the division was still dealing with losses from hurricane damage to its Gulf Coast shipbuilding facilities. Thirteen years later, Northrop may be lurching back into shipbuilding as a way to diversify away from the risk of overbidding on airplane contracts!
Not to knock Manta Ray or anything -- it truly looks like a great drone -- but maybe Northrop Grumman would be better off if it could just "pick a lane." Focus on one business to do well in, and when that business encounters problems, fix them -- rather than getting distracted and di-worsifying itself into something completely different.
