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Northrop Grumman Completes Orbital ATK Takeover for $9.2B

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Northrop Grumman Corporation (NOC - Free Report) recently announced the completion of its Orbital ATK acquisition for a total value of $9.2 billion. Interestingly, the news surfaced a day post the U.S. Federal Trade Commission (FTC) gave the final go-ahead to the deal’s closure, subject to a few conditions.

In line with the FTC’s announcement, post acquisition, Orbital ATK has become Northrop Grumman’s fourth business unit under the name of Innovation Systems.

Details of the Deal

The acquisition deal was originally announced by Northrop Grumman in September 2017. The transaction value includes $7.8 billion in cash and remaining $1.4 billion in debt.

We believe that the final regulatory nod for the deal has encouraged Northrop Grumman to add the benefits from this acquisition to its full-year result, even before the official completion of the merger. Surely, the expected operational results of Orbital ATK, nay Innovation Systems, have led Northrop Grumman to raise its 2018 financial guidance.

Benefits of the Acquisition

With Orbital ATK's incorporation, Northrop Grumman sees an opportunity to enhance its product portfolio and capability in manufacturing technologically advanced combat platforms. In particular, the acquirer will benefit from the acquiree’s knowledge and expertise in satellites, spacecraft components and commercial space launch systems.

Orbital ATK's incorporation not only enhances capabilities, innovation and competition for customers in the critical global scale domains but also provides a meaningful shareholder value-creation opportunity for Northrop Grumman, driven by strategic fit, revenue synergies from new opportunities and cost savings.

Moreover, the buyout is expected to be accretive to earnings per share for the first full year post the acquisition and is also estimated to generate an annual cost savings of $150 million by 2020. The transaction will also lead to strong combined cash flow generation that will further support financial flexibility and continued execution of capital deployment strategy.

What Lies Ahead for Northrop Grumman?

President Trump had proposed a fiscal 2019 defense budget in February 2018 that provisioned investments of $6 billion for various missile programs and $4.3 billion for space capabilities. Such proposed inclusions reflect solid growth prospects for Northrop Grumman’s newest Innovation Systems segment, which in turn are likely to boost the company’s overall profit margin.

Moreover, Orbital ATK's incorporation will also increase Northrop Grumman’s workforce strength by expert officials of the acquiree that will further enable the latter to offer new innovative and enhanced products to its customers.

Further, global rocket and missile market is projected to grow at a CAGR of 4.74% during 2017-2022 to reach a value of $70 billion by 2022 (as per Markets and Markets research firm). With Orbital ATK’s acquisition, such projections reflect improved growth opportunities for Northrop Grumman, in the coming days.

Price Performance

Shares of Northrop Grumman have rallied about 32.4% in a year compared with the industry’s gain of 41.8%. The underperformance may have been caused by the intense competition the company faces in both domestic and international markets.



Zacks Rank & Key Picks    

Northrop Grumman carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are AeroVironment, Inc. (AVAV - Free Report) , Wesco Aircraft Holdings (WAIR - Free Report) and The Boeing Company (BA - Free Report) .

While AeroVironment sports a Zacks Rank #1 (Strong Buy), Boeing and Wesco Aircraft Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AeroVironment recorded an average positive earnings surprise of 147.43% in the last four quarters. The company’s long-term growth rate is pegged at 20%.

The Boeing Company recorded an average positive earnings surprise of 29.51% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by 4.4% to $14.67 in the last 90 days.

Wesco Aircraft Holdings’ long-term growth rate is pegged at 12%. The Zacks Consensus Estimate for 2018 earnings has risen by 10% to 77 cents in the last 90 days.

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