It's been less than a month now since Boeing's (NYSE: BA) big news: On March 31, President Donald Trump announced that Boeing has won a $20 billion contract (that's the expected minimum value) to build the U.S. Air Force's first-ever sixth-generation stealth fighter to be known as the F-47.
In the weeks that have followed this announcement, which drove Boeing stock as high as $182 a share, the stock price has slumped considerably. Granted, most of the damage was probably done by the stock market's tariffs tantrum of early April. But still, when you consider that the F-47 contract will be worth billions of dollars to Boeing over the next few years, and could grow in value into the hundreds of billions of dollars over time, that fact that Boeing stock is now trading more than 10% below what it cost before the F-47 news broke... well, it's kind of a puzzler.
Why aren't investors giving Boeing more credit for its big defense contract win?
Never underestimate Boeing's ability to snatch defeat from the jaws of victory
To understand why investors might be hesitant to reward Boeing fully for its victory, consider the company's history of fumbling the ball on similar high profile government contracts. In 2014, for example, Boeing stood alongside SpaceX as one of just two space companies picked to provide Commercial Crew service transporting astronauts to and from the International Space Station. More than a decade later, SpaceX has flown astronauts to ISS nearly a dozen times already.
Boeing has done so just once -- and then had to ask SpaceX for assistance getting its astronauts home again!
Or consider the case of Boeing's 2011 win on the KC-X Tanker contract. Worth tens of billions, this award eventually turned into the KC-46 Pegasus contract for Boeing. But over the more than a decade that Boeing has been churning out the Pegasus for the Air Force, it's been forced to record more than $7 billion worth of losses on the program.
Simply put, Boeing has a long history of snatching defeat from the jaws of victory, and turning potentially lucrative contracts into PR and balance sheet nightmares through a combination of underbidding and poor program management.
Image source: Northrop Grumman.
A better defense contractor
It's in this context that I took note last month of the surprisingly better performance produced by one of Boeing's biggest rivals on high profile military contracts like the F-47: Northrop Grumman(NYSE: NOC).
In a column carried by RealClearDefense.com, Lexington Institute Vice President Dr. Rebecca Grant praised Northrop's performance on its $55 billion contract to build 100 B-21 stealth bombers for the Air Force, which is now entering its 10th year. "Smooth progress on the production line enabled the Air Force to negotiate lower rates for the B-21 bombers now in production," says Grant, citing $1 billion in cost reductions for building B-21s under the Pentagon's 2025 budget. Total costs over the next five years could be as much as 28% below initial forecasts.
Note, however, that the bomber's original projected unit cost of $550 million in 2010 dollars has increased in nominal terms. In todays, inflation adjusted dollars, the unit cost is now expected to approximate $692 million.
"Coming in under budget is a first for a stealth aircraft," as Grant points out. Just as remarkable is that the B-21 program is running on time, and not behind schedule. Northrop produced its first "production-representative" prototype in late 2022, and conducted its first test flight of the B-21 in late 2023. Low rate initial production of the aircraft began shortly thereafter, in January 2024, and Northrop has already been awarded contracts to build two production "lots" of aircraft.
What investors should know about Northrop Grumman stock
It's in the context of all the above that I began to wonder: What happens if cost overruns begin to run... "over" at Boeing on its F-47 stealth fighter contract, while figuratively next door, Northrop Grumman continues to churn out B-21 stealth bombers at below-estimated cost? Might the Air Force decide to terminate the one contract, and hand it over to the better contractor?
Stranger things have happened. Already we're seeing the Space Force begin to favor contract awards to SpaceX, for example, over contracts to Boeing and its United Launch Alliance joint venture with Lockheed Martin.
Whether or not this is how things play out, defense investors already have good reason to favor Northrop Grumman stock over Boeing. According to data from S&P Global Market Intelligence, Northrop is:
Profitable at $4.2 billion in trailing earnings, versus unprofitable Boeing (negative $11.8 billion).
Free cash flow positive with $2.6 billion in trailing FCF, versus cash-burning Boeing (negative $14.3 billion).
Northrop has less than half of Boeing's debt ($14 billion net of cash on hand, versus $29.6 billion).
Why, Northrop even pays a dividend! Not much, just 1.6%. But Boeing pays no dividend at all.
I won't say Northrop Grumman is the best investment on the planet. In fact, by my admittedly conservative metrics, the stock still looks a little expensive. But if you're in the market for a defense stock in particular, you could still do a lot worse than buying Northrop Grumman stock.
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