Major Contract Win Bolsters Northrop Grumman’s Future

The end of the year is not just a time for celebration; it also marks the closing of a fiscal quarter for the government. For investors in defense companies, December brings a wave of new defense contracts from the Pentagon.

This December, investors in Northrop Grumman (NYSE: NOC) received exciting news with a significant contract win.

Northrop Grumman Secures $3.5 Billion Contract

According to the U.S. Department of Defense’s daily summary of contract awards on December 18, the U.S. Navy has awarded Northrop Grumman a contract worth $3.46 billion. This contract involves the engineering and manufacturing development of the E-130J, previously called E-XX, as part of the Navy’s Take Charge and Move Out (TACAMO) Weapon System and the TACAMO Recapitalization Program.

In simpler terms, Northrop Grumman will develop the Navy’s new “Doomsday Plane.”

The contract entails modifying up to six Lockheed Martin C-130J-30 cargo planes to the E-130J configuration. These planes will be equipped with advanced communication and sensor systems designed to resist electromagnetic pulses (EMPs) from nuclear blasts. The aim is to ensure these aircraft can act as mobile command centers during a nuclear crisis, linking the president and senior military officials with Navy nuclear ballistic missile submarines.

Northrop Grumman will lead the development of the E-130J to replace older Boeing (NYSE: BA) 707-based TACAMO aircraft, specifically the E-6B Mercury models. Lockheed Martin will serve as a subcontractor, supplying the airframes, alongside RTX Corporation and some smaller defense firms.

It is important to note that the U.S. Air Force operates a different fleet of Doomsday Planes, consisting of four modified Boeing 747-200 airliners known as E-4B Nightwatch centers. In April 2024, a separate contract valued at $13.1 billion was awarded to Sierra Nevada Corporation to replace these airliners, marking a shift away from Boeing as the main contractor.

Image source: Northrop Grumman.

Implications for Northrop Grumman Investors

Northrop Grumman highlighted in a press release that it has long been a key contractor for the Navy, contributing to platforms like the E-2D Advanced Hawkeye AWACS and the MQ-4C Triton drone. Moreover, the company previously secured the Air Force’s B-21 Raider contract in 2015, projected to generate up to $200 billion over its lifetime.

However, while the $3.5 billion from the Navy for the Doomsday Plane is notable, it may not drastically alter the company’s outlook. The project’s delivery is expected by December 2034, meaning funding will be distributed over the next decade.

Investors should note that Northrop’s aeronautics division—responsible for the E-2D, MQ-4C, B-21, and now the E-130J—has historically been less profitable. Data from S&P Global Market Intelligence indicates this division saw around a 10% operating profit margin during the first three quarters of 2024, generally in line with past performance but significantly impacted by a $1.3 billion charge in 2023 related to B-21 production delays.

Should You Buy Northrop Grumman Stock?

The E-130J contract marks a positive development for Northrop, enhancing its reputation within the Pentagon and among investors. The mission is vital, as it ensures the country’s nuclear deterrent remains operational during conflicts, reflecting trust in Northrop Grumman’s capabilities.

Nevertheless, this contract may not be substantial enough to influence stock prices significantly. It represents only about 3% of annual sales in the aeronautics sector and is unlikely to generate high profitability given its nature.

Additionally, with Northrop Grumman’s stock trading at 28.5 times trailing earnings, it appears relatively pricey. Until the stock becomes more affordable or the company increases its profitability, it is advised to take caution before investing.

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Rich Smith has no position in any stock mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.