Price Target for Northrop Grumman as Post-Boeing Air Force Contract Looms

On Friday, President Trump announced that Boeing BA had been selected by the U.S. Air Force to engineer and build the Next Generation Air Dominance Platform, also known as the F-47 sixth-generation manned stealth fighter aircraft. 

The F-47 will replace the F-22 Raptor, which as readers probably know, is primarily a Lockheed Martin LMT product, though parts are made by other contractors including Boeing. Lockheed had been in direct competition with Boeing for this project, which is worth probably a minimum of $20 billion up front and most likely hundreds of billions of dollars (maybe several hundred billion) over the life of the program.

Lockheed had been, in the opinion of many, the favorite coming in after famously winning the F-22 Raptor and then the F-35 Lightning contracts. Northrop Grumman NOC had willingly dropped out of the competition early making this a two-horse race. Boeing, which really had not won one of these large contracts since the F-18 Hornet, needed this win badly and that's what they got. 

Yes, Boeing won this contract award despite a litany of embarrassing failures in recent years that include the Starliner spacecraft that stranded two U.S. astronauts at the International Space Station for the better part of a year. In addition, the mishaps regarding the firm's civilian 737 MAX jetliners, the KC-46 mid-air refueling tanker program and the overruns of the Air Force One upgrade program left Boeing a distinct underdog, one might have thought.

Then again, cost overruns and technical issues have left the F-35 strike fighter, which is also a Lockheed Martin led program, in a place of embarrassment itself, despite actually producing what is really a "best in class" manned fighter craft that comes in three distinct varieties, one each for the U.S. Air Force, U.S. Navy and U.S. Marine Corps.

I was set up poorly for this decision, as readers who have been around for a while know I had been long Lockheed Martin stock for quite some time. I had reduced exposure but stayed long the name as it was one of my best long-term performers over years despite it's tough looking six-month chart. Readers also know that I have avoided investing in Boeing for the length of my career (though I have traded BA short term) due to something an Air Force staff sergeant told me almost 40 years ago when we were airlifted down to Panama.

One Contract to Go

The Air Force is not done. Now that there has been an award made for the Next Generation Air Dominance Platform or F-47, there remains a secondary, but connected announcement to be made. That award will likely make news this week. I refer to the F/A-XX development and acquisition program for another sixth generation fighter to replace the F/A-18E/F Super Hornet. The F-18 Hornet has been with us in one form or another since 1983, at first complementing and then replacing the old F-14 Tomcats of "Top Gun" fame. The Hornet was a McDonnell Douglas (now Boeing) product, while the Tomcat was a Grumman, now Northrop Grumman product.

Interestingly, Northrop Grumman has not backed out of this fight and this one is a three-way "dogfight" as both Boeing and Lockheed Martin remain in this competition as well. We don't know as much as we might about this program as much of the information is not for public consumption, but it is believed that the F/A-XX, once developed, will include such technologies as maximum sensor connectivity with other aircraft and satellites, advanced stealth technology that will include multiple electronically-engineered smart skins and perhaps even the ability to act as a "mother ship" controlling a number of unmanned fighter aircraft of "next-generation" attack drones.

My Thoughts

Now, you don't have to follow me. I have already told you that I got the F-47 program wrong. That could be because the Trump administration understands that Boeing needed the win, and that Boeing is a great American industrial corporation that manufactures their products domestically and employs more than 170,000 people. That decision could have also been because the Air Force believed that Boeing had the best product, or because the F-35 has been one giant headache over the years. In other words, Lockheed may have, to some degree, worn out their welcome.

This is why, on nothing more than instinct, in trying to read the tea leaves, I have exited Lockheed Martin for now and increased my long position in Northrop Grumman. I still can't bring myself to invest in Boeing. I know. That was four decades ago, but I guess I am personally biased. It's not rational. Boeing is coming off of reputational lows as negative as any I have ever seen. Northrop, however, has not won the lead on a fighter program since, I guess the F-14, when it was just Grumman.

That said, Northrop Grumman is known to be great at developing stealth long-range strategic bombers. While the 1950s era B-52 remains the nation's most commonly used aircraft for strategic bombing, the B-2 (1997) and it's successor, the B-21 (2023) are the nation's weapons for intercontinental bombing missions (conventional or thermonuclear) under stealth conditions. Both are Northrop Grumman products. This means that Northrop can run a large, high-tech program effectively and efficiently.

One has to wonder if the Department of Defense would award another huge contract like this to Boeing (effectively putting all of their eggs in one basket) or if they are actually tired of Lockheed and the never-ending issues associated with the F-35 program. I'm betting, not the farm, but a little something on Northrop Grumman.

The Chart

Looking at the charts, LMT is the only one still trading below all three of it's key moving averages (the 21-day EMA, the 50-day SMA and the 200-day SMA). BA has recently taken back those averages and seems to be in a decent place technically. NOC, which is a stock that I have been long for years, just like I was with LMT, is also in a strong place as is BA.

Readers will see that NOC is breaking out from a descending, broadening wedge pattern, which is a pattern of bullish reversal. The stock has recently retaken all three of those moving averages that I mentioned above. Relative strength is solid, while the daily MACD is postured very bullishly.

Northrop Grumman (NOC)

Target Price: $558

Pivot: $507 (January high)

Add: Down to the 200-day SMA

Panic: Loss of the 50-day SMA

At the time of publication, Guilfoyle was long NOC equity.