Northrop on Defense

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You’d think this would be a great time for Northrop Grumman and other big defense contractors, what with two wars lingering, Kim Jong Il fomenting nuclear mischief, and the deepening worries about Iran and Pakistan.

But not so much. The stock of Northrop Grumman L.A.’s fourth biggest company has somewhat underperformed the major indexes over the last year, and a few weeks ago it got slapped with a “sell” rating by an influential analyst.

The reason: Despite the world troubles, Defense Secretary Robert Gates has gone all Lizzie Borden on the defense budget, giving it at least 40 whacks. He and the Obama administration have signaled they intend to chop even more, especially big-ticket military hardware. Northrop, of course, specializes in those very things war ships, fighter planes and such.

Last month, the military stopped Northrop’s Kinetic Energy Interceptor program. The interceptors are supposed to shoot down an enemy’s nuclear missiles shortly after launch. Even though a good deal of taxpayer money already has been spent developing the interceptors and even though a crucial test was only months away, Gates axed the program. His rationale was that the interceptor system would have to be close to the launch site. That means it would only be effective against a country like North Korea.

(I’m not making that up. Gates actually said that. A week or so later, North Korea exploded a nuclear weapon and launched a couple of test missiles.)

Now, for a company that had close to $34 billion in revenue last year, the $4 billion interceptor program is not a huge loss. But the fate of the program could be a glimpse of what Northrop is facing.

Fortunately, the huge contract $35 billion or so to build a new generation of flying refueling tankers does not appear to be a target of whacking by Gates and Obama. Unfortunately, Northrop is by no means assured of winning that contract, or actually, winning it back, since it won that contract last year and then lost it for political reasons.

Funny, but only a few months ago, Barron’s ran an article headlined “Northrop Grumman: Full Spead Ahead!” It said Northrop was in a good position partly because the defense budget would increase 4 percent in each of the next several years.

But an article in the June 1 issue of the same magazine, headlined “Trimmer Sails, Dimmer Outlooks,” said the opposite. Defense spending is getting the Lizzie Borden treatment.

The article said Rick Whittington, the defense industry analyst who recently issued a “sell” rating on Northrop’s stock as well as some other defense contractors, targets Northrop’s shares at $24 half of its $48 price last week.

Is there any silver lining anywhere for Northrop? Sure.

The Obama administration is far more likely to fund such things as intelligence, surveillance, reconnaissance and, especially, cyber security all areas of opportunity.

Ronald Sugar, Northrop’s chief executive, said during the company’s annual meeting recently that the company is particularly well positioned in cyber security. “It’s an area we have special expertise,” he noted.

Still, this is a bizarre situation, no? We have nuclear proliferation, terrorism, border security issues and, yes, wars still in two countries, and one of the companies we count on to keep us safe is facing the budget ax.

And by the way, I’m just one taxpayer, but I kind of like the idea of having a weapon that could stuff a nuclear missile that North Korea launched toward California.


Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected].

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