Aerospace and Defense Companies Battling it Out
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The global Aerospace and Defense, or A&D, Industry is expected to grow at a rate of around 2.5% over the period of 2012-2015 to reach $544.7 billion. The companies in this sector are striving hard to cash in on the underlying growth opportunities, and in order to gain most are entering into joint ventures and signing more contracts. A&D companies have growth potential, and they are adopting distinct strategies to build a stronger presence in the market. Let's check out how these strategies will work for these companies?
New contract generating higher growth opportunities
Recently, Northrop Grumman's (NYSE: NOC) Scalable Agile Beam Radar, or SABR, was selected by Lockheed Martin for upgrading and modernizing radars on the F-16 fighter aircraft of the U.S. Air Force. This upgraded radar will add unique operational capabilities to the widely used fourth-generation F-16 fighter aircraft. This program falls under Northrop's Electronic segments sectors. SABR active electronically scanned array, or AESA, is the newest airborne fire control radar, which improves the F-16 aircraft's attacking efficiency by enabling it to identify and detect targets with high-resolution synthetic-aperture radar, or SAR, maps, and electronic protection. It is expected that by developing this radar, Northrop’s electronic systems segment may generate the revenue of more than $7.13 billion this year from $6.95 last year with year-over-year growth of around 2.6%.
The company is providing the network and integration services under the Distribution Mission Operations Network, or DMON, service contract to the U.S. Air Force. It recently received the contract of $490 million to continue its DMON services for the next five years, which could potentially extend to 2023. DMON allows various aircraft platforms located around the world to operate and train warfighter pilots together in virtual conditions. The company has been supporting war-fighter training for more than ten years, and Northrop innovated it DMON services, making it more powerful, efficient, and affordable.
Last year, the company extended the network area of DMON to additional Air Force platforms and extended capabilities to realize the potential of virtual and cost-effective training. Therefore, it is expected the company may continue to receive extension requests from the U.S. Air Force for its DMON services in the future. Due to the contract, Northrop raised its revenue guidance by around $300 million to $24.3 billion for this year.
Joint venture driving future revenue
In June, Textron (NYSE: TXT) won the five-year contract worth $6.5 billion from the U.S. Naval Air Systems Command, or NAVAIR, due to the Bell Boeing V-22 program, a 50:50 joint venture between its subsidiary Bell Helicopter and Boeing (NYSE: BA). In this contract, they will carry out the production and delivery of 99 new V-22 Osprey tilt-rotor aircraft. This contract also includes the option of NAVAIR to order an additional 23 aircraft. The Osprey is a multi-role fighter aircraft built with tilt-rotor technology providing the high-speed equivalent to a fixed-wing airplane. Through the first half of the year, the joint venture delivered more than 200 V-22 aircraft, and it expects to increase this count in the future.
Boeing will look-after the fuselage, all subsystems, and the flight control system, whereas Bell will manage the wings, transmission, rotor system, and engine installation. Both companies are optimistic on their future growth, and this contract enables them to improve their efficiency in building and delivering this aircraft to their present and future customers. With their capabilities, future contracts are expected, which will drive future revenue. It is expected that Textron will able to generate overall revenue of around $13 billion this year from $12.24 billion last year, and Boeing may generate revenue of nearly $86 billion this year from $81.7 billion last year.
On August 1, Textron won a pair of Army contracts from the Pentagon worth $39.3 million. The company signed two fixed-price contracts. In the first contract, worth $31.7 million, Textron’s land and marine systems will supply commando advance armored personnel carriers and related service to the Colombian military. These commando vehicles will be based on Textron’s M117 Armored Security Vehicle that is similar to other armored vehicles, and can be heavily loaded with combat devices. The other contract, of $7.7 million, was received by its Bell Helicopter unit to arrange long lead materials, needed for low-rate initial production of “A-Kits armed packages” for Bell OH-58F Kiowa scout helicopters. It is expected that with these contracts Textron may generate higher EPS of $1.19 in the second half of 2013 compared to $0.80 in first half.
By collaborating in a joint venture and gaining new contracts, these A&D companies are in a better position to grow their future earnings. Northrop was awarded an upgraded contract from Lockheed and contract extension of DMON to serve the U.S. Air Force. Therefore, it expects further revenue growth.
On the other hand, Textron will benefit from signing new Army contracts. Moreover, by entering the joint venture with Boeing through its subsidiary, Textron and Boeing will strengthen their efficiency to gain future contracts for the V-22, which will enable them to grab future growth opportunities.
Considering these factors, I recommend buying all three stocks.
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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool owns shares of Northrop Grumman and Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!