Oct. 27, 2015: Northrop Grumman, builder of the B-2 bomber in the USAF inventory, was awarded the contract to build the next generation long-range bomber, which is yet to be named. For the moment, we’ll call it the “B-3.” For now it’s official name is the Long Range Strike Bomber (LRSB).
The Seattle Times has this story.
This is a big blow to Boeing, whose declining defense business was already in trouble from defense cutbacks and previous contract losses. The contract is worth $80bn.
Boeing’s strategy in acquiring McDonnell Douglas Corp back in 1997 was to even the revenue stream between commercial and military, in which Boeing then had a small portion and MDC was predominately military. Boeing was a sub-contractor to Northrop on the B-2, gaining a lot of its composite experience there which ultimately benefited development of the 787.
Unless Boeing finds grounds to challenge the contract award, prevails and wins a second competition, its Defense unit will continue to shrink.
Goldman Sachs, as with many other investment banks, called this a big win for Northrop.
Northrop won the Long Range Strike Bomber. We think this win, along with the existing already very strong investment merits, could drive NOC to be one of the best performing stocks in all of Industrials over the next several years, but do so with substantial visibility and limited volatility. We think this company is now very well positioned, for a long time. NOC remains the largest sub on the Pentagon’s largest growth program, the F-35. It is the strongest player in large unmanned, with Triton and Global Hawk. It should benefit from Space asset recapitalization. And it now owns the Bomber. We think NOC will grow revenue 7-10% at least 2017-2020 and potentially longer, making it essentially a growth company, but with significant visibility. And we think it will generate a ton of cash in the process; potentially moving above $20/share in free cash by the end of the decade.
Credit Suisse expects Boeing to protest.
While we expect BA/LMT to protest, the two companies noted in a joint release that they will have further discussions with the customer before determining next steps. Protests must be filed within 10 calendar days of a post-award debrief, which could be scheduled for Friday of this week.
We believe consensus leaned toward BA win: Although both teams likely offered technically comparable candidate aircraft, we have felt for some time that consensus favored a BA win. While a NOC win spreads risk, as BA, LMT and NOC each now possess one of USAF’s top 3 programs (Tanker, F-35 and LRS-B), it raises the question of what will happen to BA’s St Louis facility with the sunsetting F-18/F-15 programs. DOD affirmed today industrial base was not a consideration in the source selection.