On Thursday, Deutsche Bank reiterated a Hold rating on Northrop Grumman (NYSE:NOC) stock, maintaining a $474.00 price target. The reaffirmation follows Northrop Grumman's recent announcement regarding the U.S. Department of Defense's (DoD) purchase plans for the B-21 aircraft.
The company clarified that the DoD intends to acquire 21 aircraft across the first five Low Rate Initial Production (LRIP) lots, a figure that contrasts with the 40 aircraft some investors had anticipated.
The defense contractor also disclosed that it has secured capped pricing for an additional 19 aircraft beyond the initial LRIP lots, which suggests a higher price limit compared to the first five lots.
This pricing structure is expected to contribute to improved profitability for the subsequent LRIP lots, assuming future inflation rates are manageable. The announcement was seen as positive, as it alleviated concerns among investors that the additional units might be sold at the same price as the earlier lots.
Despite the favorable pricing terms for the additional aircraft, the exact cap on the price has not been disclosed, leaving some uncertainty regarding the profitability of the B-21 program for lots 6-8. Questions remain on how much higher the cap is set and whether it will enable the sale of these units at a substantial profit or if the margin will be narrower, potentially leading to losses.
The analyst noted that while the profitability on units 22-40 is expected to be better than that of the first 21 units, the pricing cap could limit the increase in profitability. This may result in a more gradual improvement in the B-21 program's profit curve.
It is suggested that Northrop Grumman may not experience fully healthy levels of profitability on the B-21 until production starts on units 41 and beyond, which is anticipated to be closer to the 2032 timeframe.
Further clarity on these matters is expected to be sought during the upcoming earnings call, where analysts and investors will be looking for additional information on the B-21 program's pricing and profitability projections.
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