Northrop Grumman Wins FTC Nod to Buy Orbital ATK, Ups View

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Northrop Grumman Corp.NOC recently cleared the final regulatory red tape in its acquisition of Orbital ATK OA , following the receipt of the U.S. Federal Trade Commission's (FTC) approval for the deal. Notably, the FTC nod succeeds the European Commission's approval received in February 2018.

We expect Northrop Grumman to duly complete the buyout within the first half of 2018, now that it has got through the last lap of regulatory approvals. However, this clearance remains subject to condition that the acquirer shall supply the solid rocket motors to competitors for missile contracts. Also, operations of the two companies must remain segregated.

About the Deal

In September 2017, Northrop Grumman announced that it has signed an agreement to purchase rocket and satellites-maker Orbital ATK for a total cash of $7.8 billion. Additionally, it disclosed plans to setup Orbital ATK as a new and fourth business unit, on the deal's closure.

Through this merger, Orbital ATK's knowledge and expertise in satellites, spacecraft components and commercial space launch system will significantly expand Northrop Grumman's product offering.

Also, Orbital ATK's contracts with the NASA and the U.S. Army are expected to boost Northrop Grumman's product portfolio and rake in more than $4.8 billion in the form of annual revenues, according to Orbital's 2017 financials.

Positive Synergies Led to Raised View

Earlier, Northrop Grumman announced that post the merger, this new business unit will be accretive to earnings per share and free cash flow during the remaining months of 2018. In particular, adding Orbital ATK will boost Northrop Grumman's earnings per share and free cash flow in the first year of acquisition and lead to annual cost savings of nearly $150 million by 2020.

Keeping up with its earlier announced strategy, Northrop Grumman will name its fourth business unit as Innovation Systems, post integration of Orbital ATK. We believe the final regulatory nod for the deal has encouraged Northrop Grumman to add on 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.

In particular, post the merger, Northrop Grumman expects to generate earnings in the range of $16.20-$16.45 on revenues of $30 billion in 2018. This reflects a solid improvement when compared with the company's earlier earnings guidance of $15.40-$15.65 per share on revenues of $27 billion. Northrop Grumman has also raised its guidance for free cash flow from $2-$2.3 billion to $2.3-$2.6 billion for 2018.

Looking Ahead

New macro challenges along with rising completion are lately prompting aerospace and defense industry players to revisit their business models as well as expand core operations and product lines. We believe Northrop Grumman's proposal to buy Orbital ATK last year was also driven by similar rationale.

So far, Northrop Grumman provided satellite communications, but now, with Orbital ATK in its business, the company will be able to manufacture satellite. This, in turn, will enable the acquirer to win major contracts from NASA, thereby adding to length and breadth of its existing product portfolio.

With similar expansion agenda in mind, General Dynamics GD completed the acquisition of IT service provider CSRA Inc. in April 2018 for $9.7 billion. Realizing the increasing demand for technology software and services worldwide, this deal should serve as a strategically fit step for General Dynamics to expand its footprint in the cybersecurity space.

Price Performance

In a year's time, shares of Northrop Grumman have rallied about 30% compared with the industry 's increase of 41.8%. The underperformance may have been caused by the higher operating expenses that the company incurs, which tend to weigh on its profit margin.

Zacks Rank

Northrop Grumman has a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Boeing BA carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Boeing has surpassed the Zacks Consensus Estimate in the trailing four quarter, with an average positive surprise of 29.51%. Over the last 60 days, the company's 2018 earnings estimate has moved up by 4% to $14.61 per share.

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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.

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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