Northrop Grumman Corporation (NOC) has signed a $1.7 billion or 1.2 billion euro contract for NATO's Alliance Ground Surveillance system or AGS. Northrop Grumman will be the prime contractor for the NATO AGS program and build the Global Hawk air vehicle, supporting systems and payloads. The contract also includes the purchase as well as initial operation and maintenance of five Global Hawk unmanned aircraft and transportable ground stations.
Operating under NATO command, the AGS is expected to be the major data source for NATO's system for Joint Intelligence, Surveillance and Reconnaissance or JISR. The main operating base of NATO AGS will be located at Sigonella, Italy.
Los Angeles-based Northrop Grumman Corporation is one of the largest defense contractors in the U.S. The company supplies a broad array of products and services to the U.S. Department of Defense (DoD), including electronic systems, information technology, aircraft, space technology and systems integration services. The positive case for Northrop Grumman stems from revenue growth across the board and a broad diversification of programs.
Northrop Grumman offers a strong program portfolio positioned to take advantage of focus areas in the defense space, an improving balance sheet and an ongoing share repurchase program. Also, its product line in high priority categories, such as defense electronics, unmanned aircraft and missile defense, gives Northrop Grumman an edge over competition.
The company’s backlog is expected to see further upside in the near future through unmanned aerial vehicle (UAV) platforms, including Broad Area Maritime Surveillance (BAMS), Fire Scout and Navy Unmanned Combat Air System (UCA). Thus, the quantitative Zacks # 2 Rank (short-term Buy rating) for the company indicates downward directional pressure on the shares over the near term.
However, these are offset by apprehension regarding defense cutbacks on high-cost platform programs, over-exposure to the DoD budget, lower backlog, cost over-runs and reductions in Afghanistan and Iraq operations.
We maintain our long-term ‘Neutral’ recommendation on Northrop Grumman. This is in line with its peers like General Dynamics Corporation (GD) and Lockheed Martin Corporation (LMT).
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