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Here’s Why Northrop Grumman’s Decline on Thursday Might Be an Overreaction

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Northrop Grumman Corporation (NYSE:NOC) has just won a major military contract from the U.S. Department of Defense, but its stock is currently down amid a broader market decline. However, the world’s best money managers appear to have foreseen in the second quarter this major win for the defense contractor.

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According to the U.S. Department of Defense’s daily digest of contracts, Northrop Grumman Corporation (NYSE:NOC) has been awarded a $3.2 billion contract by the U.S. Air Force for the development, upgrade and maintenance of Global Hawk surveillance drones. The firm makes varied models of the drone for the U.S. Air Force and the U.S. Navy. The contract is of the indefinite delivery and indefinite quantity kind which means that the Air Force can order parts and services as the need arises up to September 30, 2020. All work under the contract will have to be finished by September 30, 2025.

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The new Northrop Grumman contract follows a senior U.S. Air Force official saying earlier this month that upgrades to the Air Force Global Hawk fleet may cost just half of the previous estimate of $4 billion, Reuters reported. The upgrades discussed by Lieutenant General Robert Otto, deputy chief of staff for intelligence, surveillance and reconnaissance, were for a new sensor and optical camera for the drone. It is unclear, however, whether these upgrades are part of the multi-billion contract Northrop Grumman has just been awarded. The Air Force is also still flying Lockheed Martin Corporation (NYSE:LMT)’s U-2 spy planes, but General Otto told Reuters that the Air Force cannot maintain both the Global Hawk and the U-2 programs. The upgrades to the Northrop Grumman drones comes as the Air Force is expected to retire its U-2 planes.

Also, earlier this month, Northrop Grumman announced that its board has approved an additional $4 billion for its stock buyback plan. By the end of June, the firm had bought back over 54 million shares. In December 2014, the company’s board of directors approved a $3 billion stock repurchase plan. The firm plans to repurchase a total of 60 million shares by the end of this year.

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