SuperModels Community
Join the discussion in the MSN Money SuperModels Community.
SuperModels
Recent articles:
• StockScouter stays strong with energy, housing, 7/6/2005
• High-tech winners power cars of tomorrow, 6/29/2005
• Two Viacoms will be better than one, 6/22/2005
More...
| | SuperModels
Northrop Grumman's fight for a new warship
Much of Northrop's future hangs on the fate of the high-tech DD(X) warship it is now developing. The next-generation destroyer could be just as critical to the U.S. as it faces potential threats from China and elsewhere.
By Jon D. Markman
As the world focused last week on the terror attacks in London, a much more dangerous threat continued to develop thousands of miles away. That would be the buildup of the Peoples Liberation Army of China, which has garnered scant comment from the Bush administration for fear of losing Beijings help in neutralizing North Korea.
Combating a Chinese threat five to 15 years from now, potentially over scarcities of energy and food, will make facing Middle Eastern terrorism look like childs play. Yet the United States increasingly bulks up on homeland defense and Iraqi operations at the expense of developing weapons systems necessary for fighting a much larger and well-armed adversary.
Ground zero for those who believe that the government is willfully ignoring a major future threat is the battle over the U.S. Navys new DD(X) warship program, which faces a big appropriations cut in Congress in a fiscal 2006 budget set to spend $364 billion on defense. Bean counters have attempted to slash $1 billion in research and development from the program, which is intended to create a new class of stealthy, high-tech destroyers to replace our aging warfare fleet.
The dangers of 'Pimp My Battleship'
Critics of DD(X) go so far as to suggest that the Navy instead drag two 60-year-old battleships out of mothballs, slap on some lipstick and float them out to face a future enemy. In the defense equivalent of the popular MTV show Pimp My Ride, veterans nostalgic for the intimidating sound of 16-inch guns propose that the USS Wisconsin and USS Iowa -- originally commissioned in the 1940s and removed from active service in 1992 -- receive a $2 billion, two-year makeover of electronics and paint.
For investors, this battle royal is more than just a curiosity. It is of critical importance to the fortunes of Northrop Grumman (NOC, news, msgs), which has developed the DD(X) program so far, as well as its chief shipbuilding rival, General Dynamics (GD, news, msgs). The two contractors are competing for the final contract, worth up to $50 billion -- winner-take-all if the Navy gets its way, or split between the two if a group of stubborn congressmen prevail.
Related news and commentary on MSN Money
Northrop and General Dynamic shares are both up 125% since the start of the decade, vs. a decline of 18% for the broad market. They havent exactly been marking time. But making money in defense contracting requires a fiendish attention to the extraction of new business from the Pentagon and Congress. One big deal can devastate the loser and propel the winner to new heights, as happy shareholders of Lockheed Martin (LMT, news, msgs) certainly learned when that company won a $200-billion program to build the joint-strike fighter for the Defense Department in October 2001.
Northrop shares have muddled along this year, up 3%, as the betting has shifted against the likelihood of the DD(X) programs success. Ultimately, one would hope that Congress would come to its senses and get this program passed, as it doesnt just provide the standard air, submarine and ship defenses of past destroyers, but also supports amphibious Marine landings and provides other naval gunfire support with a barrage of next-generation missiles and 155-millimeter guns.
Each ship is expected to cost $1.7 billion, which sounds like a lot. But that total amortizes the development cost of an entirely new type of hull, propulsion system and gun system that would be used on many other ships to come. Substituting a couple of old battleships for a new destroyer is pennywise and pound foolish, as the main cost of running a navy over the long term is manpower. The battleships require 1,500 sailors who would have to be trained on the ancient art of steam-driven propulsion, while the destroyers, stocked with productivity-enhancing automation, require fewer than 150 sailors each.
| |
|
|
|
|
StockScouter data provided by Gradient Analytics, Inc.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
|
