It's been more than a decade since Northrop Grumman(NYSE: NOC) first began building MQ-4C Triton unmanned aerial vehicles for the U.S. Navy, intended to form the backbone of the Navy's Broad Area Maritime Surveillance (BAMS) Demonstrator Unmanned Aircraft System program.
At one time, the Navy intended to buy as many as 68 Tritons, valued at up to $1.2 billion in total contracts. But the new naval drones turned out to cost a lot more than initially expected, and over time the Navy has ratcheted back its purchasing quite drastically.
In fact, reviewing recent contract announcements on the Pentagon's daily digest of contract awards, it appears that the last time the Navy ordered any Tritons at all from Northrop was nearly 18 months ago, in October 2023, when it placed an order for three USN Tritons, and one more for Australia. It was with some surprise then, that I noticed earlier this month that the Navy has just placed an order for two more of these maritime surveillance drones.
Even more surprising was the price: $267.2 million.
Sky-high cost overruns
A little calculator work suffices to determine that, at $1.2 billion for 68 drones, the Navy initially anticipated it could buy Tritons from Northrop for just a little over $30 million apiece, a bargain in the world of Pentagon budgets. But that production cost has already risen steeply, and appears to show no sign of slowing its ascent.
The contract announced earlier this month, $267.2 million for two Tritons and a Navy main operating base, implies the per-unit cost of the MQ-4C has already more than quadrupled to more than $133 million per bird. Even accounting for inflation, that's quite a sizable cost overrun.
And it's not done yet.
One report from Inside Defense last year cited Government Accountability Office estimates forecasting that, by the time Northrop winds down this program three years from now, "the newest version of the aircraft [is] estimated to cost $618 million per unit." That's nearly the cost of eight piloted F-35 stealth fighter jets.
Granted, cost overruns aren't exactly unheard of in government weapons programs. The instant case brings to mind the Air Force's late 1990s program to build B-2 stealth bombers, which suffered similar cost overruns, and which was eventually canceled well short of its initial production goal (only 21 planes were built, out of 132 planned). Because so much of the program's cost was front-loaded to pay for development of the plane, and that money had already been spent before production was stopped, the $55 billion program ended up costing more than $2 billion per plane. As one defense wag quipped: The B-2 "literally cost its weight in gold."
I suspect a similar dynamic is at play in the inflation of Triton's cost from $30 million per airframe to $618 million.
Image source: Northrop Grumman.
What this means for Northrop Grumman
Whatever the reason for the ballooning costs, this dynamic bodes poorly for this defense stock. Last year, FlightGlobal reported the Pentagon intends to order Northrop to shut down Triton production in October 2028 after building its 27th -- and final -- Triton for the Navy. (Australia will end its purchases earlier, after buying just four of the drones.)
Already, the war in Ukraine has demonstrated a clear preference among warfighters for cheap and easily expended drones (both short- and long-range) over complex and expensive systems like Triton. When viewed in this context, the abrupt wind-down of the Triton program, like the shuttering of production on Northrop's Fire Scout drone helicopter and of its RQ-4 Global Hawks, suggests Northrop has already decided (willingly or not) to retire from this particular field of weapons production.
Northrop does still have other arrows in its quiver, of course. Its B-21 stealth bomber, being built for the Air Force, is still in early days for example. The Navy also recently awarded Northrop a $3.5 billion contract to build E-130J Doomsday Planes, and the company is venturing into deeper waters with its new Manta Ray drone submarine. I'm also encouraged by Northrop's early efforts to turn itself into a space company.
Still, I have to admit to more than a little disappointment that Northrop failed to turn into the drone-production powerhouse that I once hoped it would become. As this side of its business flames out, I can only look at the stock's numbers, its subpar free cash flow relative to reported earnings, and its anemic 3% long-term earnings growth rate (as estimated by S&P Global Market Intelligence), and lament that Northrop never lived up to its potential.
Even at an unassuming 17.5 times trailing earnings valuation, I can't get excited about buying Northrop Grumman stock today.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Nvidia:if you invested $1,000 when we doubled down in 2009,you’d have $284,402!*
Apple: if you invested $1,000 when we doubled down in 2008, you’d have $41,312!*
Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $503,617!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
