The federal government last week sent waves through the global aerospace industry when it recommended the Pentagon reopen bidding on a recently awarded $35 billion Air Force tanker contract.
But Wall Street reacted with a collective shrug.
Despite news that Northrop Grumman Corp. could lose one of the largest defense contracts ever awarded, the Los Angeles-based company’s stock price actually climbed in the days following the announcement. Shares closed June 19 at $71.35, up nearly 1 percent from its opening price the day the ruling was announced.
Some analysts chalk that up to the belief that the deal is essentially icing on the cake for Northrop. The company was not expected to win the contract in the first place, so even if Northrop loses the deal, it is no worse off than it was a few months ago.
“Most people didn’t factor (the tanker contract) into the Northrop Grumman estimates,” said Cai von Rumohr, an analyst with Cowen & Co. LLC who maintained an “outperform” rating on Northrop’s stock.
The Pentagon shocked aerospace observers Feb. 29 when it awarded the lucrative contract to build 179 aerial refueling tankers to Northrop and its partner, the European Aeronautic Defence and Space Co. But last week, the Government Accountability Office ended a months-long investigation into an appeal by Chicago-based Boeing Co., ruling that the Air Force’s decision to award the contract to Northrop was based on a flawed competition.
The GAO ruling, though not binding, is likely to be followed, analysts say. Still, Northrop could have a decent shot at winning the new deal, von Rumohr said, since the Air Force has already demonstrated an affinity for the Northrop/EADS aircraft.
“Northrop has at least a 50-50 chance in this because the Air Force picked it once, so presumably they like the plane,” he said.
Northrop and EADS, the Netherlands-based parent of Airbus, won the deal with a tanker based on an A330 commercial jet. Boeing, which bid a plane based on its smaller 767, said the Air Force did not make clear its preference for a larger plane, leading the company to file a formal protest.
Even if Northrop ultimately wins the contract, the GAO ruling comes at a bad time for Southern California, which is struggling through a housing slump and high rates of unemployment.
Northrop last week said it plans to suspend the hiring of several thousand engineers in Southern California until the contract situation is settled. The new contract competition could drag on for years, dealing a blow to the local aerospace industry.
“It’s not good news,” said Jack Kyser, chief economist with the Los Angeles County Economic Development Corp. “(Northrop) was going to do a lot of the engineering work in Southern California, but they’ve said they will suspend hiring.”
