Northrop Grumman Still on Top

Los Angeles-based defense contractor Northrop Grumman Corp. (NOC - Analyst Report) bagged a U.S. Army communications system contract along with Cobham Intercoms LLC earlier this week. The upgraded vehicle intercom system (VIS-X system) contract – worth $2.4 billion – was won by the equal joint venture.

According to Steve Collier, the Vice President of Cobham Defense Communications, “VIS-X will allow soldiers and other vehicle mounted troops to communicate faster, safer and more securely with greater understanding of the operational situation during the most demanding missions."

The system touted to provide enhanced speech intelligibility and hearing protection is intended for use in military tactical vehicles such as the Humvee, Abrams, Bradley tanks, etc. The system would initially be installed on new military vehicles and refurbished in a phased manner in older ones. The deal is a natural extension of the fore-runner intercom system – the VIC-3 communication system – that the joint venture already supplies to the army.

The "indefinite delivery/indefinite quantity" contract, spread over a 10-year period, will start from 2010. In the first year of the contract, a monthly delivery of 500 systems is stipulated, which will rise to a monthly delivery of 2,000 systems from the second year.

Although Northrop Grumman fell more than 4% over the past month, with a high dividend yield of 3.74 and an ROE of 12.8%, we remain bullish about its future prospects. Accordingly, we maintain our BUY recommendation on Northrop Grumman.