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Northrop Grumman (NOC), the designer and manufacturer of a wide range of aerospace and defense products, has decided to spin off its shipbuilding business, Huntington Ingalls Industries. Over the last several months, management had been considering several separation options and, in the end, decided that creating a new publicly-traded company was the best option for Huntington's operations, as well as Northrop shareholders. We agree with management's assessment.

According to the plan, on March 31st, stockholders of record will receive one share of Huntington for every six shares of Northrop owned. No fractional shares of Huntington will be distributed; fractional shares will be aggregated and sold in the open market, and the proceeds of the sales will be dispersed in the form of cash payments to Northrop stockholders who would have been entitled to fractional shares. After the distribution, Huntington Ingalls will begin trading on the New York Stock Exchange under the ticker HII. This transaction is still subject to regulatory approval. But we feel confident that Northrop will receive the go-ahead from the U.S. Securities and Exchange Commission.

This plan ought to benefit shareholders, since the U.S. Navy will likely spend heavily on rebuilding and upgrading its forces in the years ahead. As a stand-alone company, Huntington's sole focus can be directed at shipbuilding, rather than being just one part of Northrop Grumman's vast portfolio of aerospace and defense products. However, the current budgetary environment adds an element of risk. Over the next few years, it is possible that several military programs will be reduced or eliminated, which could hurt profitability here. We advise current Northrop and future Huntington shareholders to monitor Congressional actions in regard to the Defense budget.

The remaining Northrop Grumman operations ought to continue to perform well. It is a major subcontractor for the F/A-18 and F-35 fighters. Total orders for both aircraft are substantial, and the F-35, despite some recent testing problems, is slated to enter into full production soon. The United States, as well as eight partner nations, plan to purchase a few thousand F-35s, and several nonpartner countries, at this time, are contemplating orders. Demand for Northrop's unmanned aircraft and electronic warfare products should remain strong, as well. Investors may want to take a look here. Along with gaining a position in Huntington, Northrop Grumman's continuing prospects appear solid.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.