When Northrop Grumman (NYSE: NOC) reported earnings in January, it was a disaster. However, there's good reason to believe the company's first-quarter earnings will be a marked improvement.
One indication of that is that analysts are raising their earnings estimates. In fact, six analysts tracking the stock have raised their first-quarter earnings estimates in the last 30 days.
That makes sense because outside of a few misfires, Northrop Grumman has been reliable. It's nailed down some big-time contracts over the past few months and years. And it actually beat earnings estimates in each of the past two quarters.
Northrop Grumman's Earnings Journey
Northrop Grumman's last earnings report wasn't a disaster because it failed to meet expectations. It was a disaster because the company revealed an unexpected one-off charge to its B-21 Raider program.
That is, Northrop took a nasty $1.56 billion pre-tax charge against its next-generation stealth bomber.
Turns out the Air Force used 2010 as the base year for calculating the bomber's costs — which was $550 million for the initial 2015 contract. Of course, with inflation that translates to $778 million, which means in today's dollars Northrop will be selling its first five production lots at a loss of roughly $228 million apiece.
The market responded with a sell-off that shaved 10% off NOC stock. But again, charge aside, Northrop Grumman actually beat on earnings for the quarter.
The company reported adjusted earnings of $6.27 per share for the fourth quarter, topping the Zacks Consensus Estimate of $5.75 by 9%. Total sales of $10.64 billion also beat the consensus estimate of $10.44 billion.
For the first quarter, analysts expect NOC to post quarterly earnings of $5.83 per share, which represents a year-over-year increase of 6%. Revenue is projected to be $9.77 billion, up 5.1% from the year-ago quarter.
That's in line with the company's previous performances. And while the bomber program is going to be a bit more of a drag going forward, it's one that NOC ought to be able to overcome. Especially because CEO Kathy Warden warned several times last year that the program would likely lose money in its early stages.
We even saw a similar situation play out over at Lockheed Martin (NYSE: LMT). Lockheed's F-35 was plagued by cost overruns and criticized for its lofty price tag too. But that didn't stop it from becoming a major revenue generator for the company.
The same will likely be true for Northrop Grumman. And in the meantime, it's scored some big wins to start the year.
Blockbuster Deals
Last week, word leaked that Northrop Grumman is working with SpaceX to build a network of spy satellites for the National Reconnaissance Office. The classified contract is believed to be worth $1.8 billion
The constellation will improve the government's ability to monitor targets from low-Earth orbit, providing high-resolution imagery more typically captured by drones and spy planes.
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Additionally, DARPA has tapped Northrop Grumman to develop a lunar railway concept as part of the 10-year Lunar Architecture (LunA-10) Capability Study. (This is something I first mentioned on The Wealth Advisory's Top 10 Stocks for April segment.)
But if you missed it, this heady task means Northrop will have to…
- Identify the resources needed to build a railway on the moon.
- Outline the potential cost of such a project.
- Evaluate technological and logistical risks.
- Prototype and design its architecture.
- Identify any issues with grading the rail line, building its foundations, and laying the track.
- Putting in place a plan for long-term inspection, maintenance, and repair.
- And figure out how to build it with robots.
No value for that contract was released, but it's probably pretty high. That's a lot of work and man-hours.
And speaking of DARPA, Northrop Grumman also just completed assembly on another project it'd been working on for the clandestine agency — the "Manta Ray."
The Manta Ray is an underwater drone designed to operate at long range for extended periods of time. It's payload-capable, which means it can fire weapons and it eliminates the need for human logistics, which can be costly.
No doubt, we've already seen the massive effect aerial drones have had on the battlefield. But surface and submersible drones could have a similar impact on conflict.
Ukrainian forces have already put them to good use, deploying remote-controlled speedboats laden with explosives to crash into Russian ships in the Black Sea.
The U.S. Navy aims to do the same. It even envisions combining fleets of undersea, ocean surface, and aerial drones to repel Chinese forces from the Taiwan Strait in the event of an attempted invasion. (That effort has been dubbed "Hellscape.")
In any case, Northrop Grumman continues to ink massive contracts with the government — enough to outpace its recent setbacks. Additionally, ongoing fighting in the Middle East and Ukraine and soaring defense budgets around the world ensure that it will continue to build a steady backlog of more traditional work.
Of course, if you really want to profit from advanced military technology, then you should check out my latest report for Secret Stock Files. It goes into detail about how AI is now being used to gain an edge on the battlefield.
Fight on,
Jason Simpkins
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