Northrop Forced to Stop LRS Bomber Work Amid Protest

The U.S. Air Force has asked Northrop Grumman CorporationNOC to stop work on the long-range strike bomber ("LRS-B") contract, after the company's rivals, The Boeing Co. BA and Lockheed Martin Corp. LMT , filed protests against the selection process alleging that it was "fundamentally flawed." (Read: Boeing and Lockheed File Protest over Pentagon's LRS-B Bid )

The value of the stealth bomber contract is quite substantial: potentially $80 billion, and it appears that Boeing and Lockheed Martin will strive to get back the contract.

The Contract

The LRS-B contract was awarded to Northrop for manufacturing a new generation of aircraft that has the ability to carry nuclear weapons and penetrate into enemy territory. The companies were competing to build 100 stealth bombers that will enter service in the 2020s.

Boeing and Lockheed had teamed up to bid for the Air Force's contract to build the new LRS-B. However, the partnership lost the bid after the contract was awarded to Northrop at October's end. The new LRS-B planes are expected to have better stealth capabilities than their predecessors, in addition to the ability to carry heavy nuclear weapons.

The Protest and Reaction

The protest from Boeing and Lockheed Martin was primarily based on concerns regarding the Air Force's use of historical cost data associated with the development and production of the B-2 bomber built by Northrop 20 years ago.

On the contrary, management at Northrop expressed disappointment on the decision of its peers to disturb a program that has such high importance with regard to national security.

What the Air Force Thinks

The Air Force, however, asserted that its "selection team followed a deliberate, disciplined and impartial process to determine the best value for the warfighter and taxpayer."

It also said that Northrop's bomber would cost $511 million per plane on an average in terms of 2010 dollars, which is well below the program's cost cap of $550 million per plane.

Where Do We Stand Now?

Under the federal law, the U.S. Government Accountability Office, an arm of the Congress which is responsible for handling federal contract protests, has 100 days to evaluate the issue. A decision is expected on Feb 16, 2016.

If the partnership ultimately fails to get the contract, Lockheed Martin can still fall back on the Pentagon's F-35 strike fighter contract worth an overwhelming $1.5 trillion. However, that cannot be said for Boeing, as its St. Louis facility is expected to stop manufacturing military planes by the end of the decade, which makes its bid for the LRS-B crucial for the plant's survival.

The Air Force's direction to stop production of the stealth bomber had a marginal impact on the share price of Northrop, which inched down 0.76% to close at $180.31 yesterday.

Zacks Rank

Northrop currently has a Zacks Rank #3 (Hold). A favorably placed stock in the same space is General Dynamics Corp. GD carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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