Northrop's Drones Proposed for Sale

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Department of Defense (“DoD”) has made a proposal to Congress for the sale of Northrop Grumman Corporation’s (NOC) Global Hawk surveillance drones to the government of South Korea under the foreign military sale (“FMS”) program. The deal is expected to be $1.2 billion.

If the request is approved by the Congress, then Northrop will sell four RQ-4 Block 30 (:I) Global Hawk spy drones. Per the deal, Northrop would also supply associated equipment, parts, training and logistical support, which would include infrared and electro-optical sensors, imagery analysis systems and moving target indicators on board the Global Hawk Block-30 unmanned aircraft.

These drones have been used by the U.S. Air Force in Afghanistan and Iraq. The deal would be the first order in the Asia- Pacific region for the high-altitude surveillance drones.  Despite being interested in buying the aircraft, Australia has not yet placed an order for the same.

In the defense budget proposal for 2013, DoD had proposed to cancel the Block-30 version of the Global Hawk drone. Instead, it was looking for the purchase of more advanced Block-40 model. However, Congress opposed to the proposal and declared in the defense authorization bill that Air Force is not allowed to retire the Block-30 drones at least until the end of 2014.

Apart from Northrop’s proposal, DoD had also requested for the sale of Raytheon Company’s (RTN) 117 AIM-9X Sidewinder missiles worth $140 million to Turkey, a foreign military sale of satellite ground stations worth $125 million by L-3 Communications Holdings Inc. (LLL) to Iraq, and a $406 million sale of artillery rockets by Lockheed Martin Corporation (LMT) to Qatar.

All these requests are just a notification for potential purchases. They will be firm orders only when approved by the Congress and the countries sign contracts with the DoD.

Based in Falls Church, Virginia, Northrop Grumman Corporation supplies a broad array of products and services to the U.S. DoD, including electronic systems, information technology, aircraft, space technology, and systems integration services.

Northrop has a strong presence in Air Force, Space & Cyber Security programs. Northrop’s product line is well positioned in high priority categories, such as defense electronics, unmanned aircraft and missile defense.

Revenue and earnings growth continue to be driven by its strong presence in the current focus areas of cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance systems, advanced electronics and software development. Moreover, this contract would enhance the company’s position.

However, these positives 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 the Afghanistan and Iraq operations. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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