The end of (one) year and start of another can be an exciting time. For kids it means Christmas, with piles of presents under the tree. For adults, New Year's Eve parties and bottles of champagne.
The end of the calendar year also, however, coincides with the end of another fiscal quarter for the government. And for investors in defense stocks, that means the end of every year brings an avalanche of new defense contracts being announced by the Pentagon in the last weeks of December.
And this December brought investors in Northrop Grumman (NOC 2.17%) a very big contract win indeed.
A $3.5 billion contract for Northrop Grumman
As reported in the U.S. Department of Defense's daily digest of contract awards for Dec. 18, the U.S. Navy has awarded Northrop Grumman $3.46 billion "for the engineering and manufacturing development of the E-130J, formerly known as E-XX, Take Charge and Move Out (TACAMO) Weapon System in support of the TACAMO Recapitalization Program for the Navy.
That's a rather drawn-out way to say Northrop Grumman will build the Navy's new "Doomsday Plane."
Under this contract, Northrop will modify up to six Lockheed Martin (LMT 1.05%) C-130J-30 cargo planes to the E-130J configuration, including outfitting the aircraft with advanced communications and sensor gear hardened to withstand the effects of electromagnetic pulses (EMPs) from nuclear blasts. This will enable the aircraft to function as mobile command centers in time of nuclear war, linking the president and top military officers, and ensuring they have secure communication to Navy nuclear ballistic missile submarines at sea.
Northrop will oversee development of the E-130J to replace an aging fleet of Boeing (BA -0.43%) 707-based TACAMO aircraft that are configured as E-6B Mercury aircraft. Lockheed will be one subcontractor on the project, providing the aircraft bodies. RTX Corporation (RTX 0.98%) and a pair of smaller private defense contractors are also part of Northrop's team .
Note that the U.S. Air Force has its own, separate set of Doomsday Planes, comprising four modified Boeing (BA -0.43%) 747-200 airliners configured as E-4B Nightwatch mobile command centers. In April 2024, a $13.1 billion contract to replace these airliners was awarded to privately held defense contractor Sierra Nevada Corporation, with Boeing losing its historic role as prime contractor on this fleet.
But while similar, this contract is not that one.
Image source: Northrop Grumman.
What this means for Northrop Grumman investors
As Northrop pointed out in a press release discussing the win, it is already an important contractor to the Navy, building both E-2D Advanced Hawkeye AWACS planes and MQ-4C Triton drone aircraft. Even more importantly for the company, Northrop won the Air Force's B-21 Raider contract in 2015, a program that could eventually yield as much as $200 billion in sales for the company.
In that context, an extra $3.5 billion from the Navy to upgrade its Doomsday Planes may not sound like much, especially when you consider that the delivery date on these planes isn't until December 2034, meaning the money will be spread out over the next 10 years.
Northrop Grumman investors should also be aware that Northrop's aeronautics division (which builds the E-2D, the MQ-4C, the B-21, and now the E-130J) is arguably the company's least profitable division. According to data from S&P Global Market Intelligence, aeronautics sales earned Northrop about a 10% operating profit margin in the first three quarters of 2024, similar to what it has earned in most years, with the exception of 2023. (If you recall, 2023 was the year Northrop took a $1.3 billion charge to earnings in aeronautics to account for problems spinning up production on the B-21.)
The company's other three main business divisions usually all earn significantly higher profit margins than does aeronautics.
Is Northrop Grumman stock a buy?
Winning the E-130J contract is still good news for Northrop, of course. If nothing else, it's a kind of prestige project that elevates the company's standing in the eyes of both the Pentagon and its own investors. There are few missions more important, after all, than being certain the nation's nuclear deterrent can function in time of war -- and the Pentagon has entrusted Northrop Grumman with this mission.
That said, I don't think this contract alone is enough to move the needle on Northrop Grumman stock. It's not especially large, amounting to barely 3% of annual sales in the aeronautics segment. It won't be particularly profitable because it's an aeronautics contract.
And it doesn't change the fact that at 28.5 times trailing earnings, Northrop Grumman is already a pretty expensive stock. Until it gets either a whole lot cheaper or a whole lot more profitable (preferably, both), I won't be recommending Northrop Grumman stock as a buy.
