On Aug. 30, off the coast of Hawaii, sailors aboard the USS John Paul Jones tracked, intercepted, and shot down a medium-range ballistic missile.
It was a milestone in our nation’s defense system.
Doing so put North Korea and Kim Jong-un on notice that we can shoot down their missiles before those missiles reach the U.S. mainland or one of our Asian-Pacific allies.
And it’s about time.
North Korea’s ballistic missile and nuclear weapons programs have developed much, much faster than the Pentagon predicted. And that has created a threat that has jump-started our need for advanced missile defense technologies – and spending on them.
Indeed, missile defense technology is so critical to the United States right now that it was a big driver behind Northrop Grumman Corp. (NYSE: NOC)’s just announced plan to acquire Orbital ATK Inc. (NSE: OA) for $9.2 billion.
Orbital specializes in the missile defense technology that we so badly need right now.
And so the deal reaffirms our belief that Northrop is the best of the Big Defense plays out there. Northrop has soared nearly 46% since our first recommendation in April 2016 – including a 10% gain since the Sept. 17 announcement of the Orbital deal.
Today I want to go in-depth on why that Orbital deal reinforces our “case” for Northrop.
And I want to show you how you can take a ride on all the defense industry M&A deals we’ll be seeing over the next few years.
This single investment gained just 1.75% in 2015 – but 19% in 2016.
Now imagine what it’s going to do in the future as the Trump administration bulks up our military spending…
With North Korea testing a series of missiles and threatening the United States with nuclear war, high-tech missile defense systems have moved from the “should have” category to the “must have” one.
According to data compiled by the U.S. Department of Defense’s Missile Defense Agency (MDA), the missile-intercept system we used on Aug. 30 off Hawaii has an 83% success rate.
But the Pentagon wants to do better than that.
In order to protect ourselves, we must do better than that.
To do so, our military leaders have begun developing a new set of land-based nuclear missiles. And they’re prepared to spend upward of $80 billion on the project.
The Orbital ATK deal gives Northrop Grumman everything it needs to deliver cutting-edge missiles – and missile defense systems… and more.
Orbital ATK was created in 2015 through a merger of Orbital Inc. and
Alliant Techsystems Inc. (ATK). The combined firm now derives around 40% of sales from defense systems, another 35% from flight systems, and around 25% from space systems.
In the two years since Orbital and ATK came together, the firm has built more than 350 advanced tactical missiles and over 190,000 tactical rocket motors.
Northrop sees Orbital’s defense segment as the key lure here. That unit rakes in around $2 billion in sales each year from Missile Products, Armament Systems, and Defense Electronics.
Buying Orbital ATK also opens the door to NASA…
The Dream Is Alive
Orbital’s Antares launch system can “hurl” heavy payloads – satellites, astronauts, etc. – into low Earth orbit. The Antares rocket is the key launch platform to resupply and transport astronauts to the International Space Station.
The Missile Defense Agency is making a big investment in Ground-based Midcourse Defense (GMD) system, a “kinetic kill vehicle” that is the next-generation missile interceptor. Northrop builds the control systems for the GMD.
The merger also brings Northrop instant strong market share in the sector for missile launchers that are paired with the control systems. In effect, the firm will become a one-stop shop for GMD.
Northrop Grumman is a $25 billion prime defense contractor that develops and manufactures a wide range a range of advanced tech, including cybersecurity, sensors, directed energy weapons (lasers), and surveillance systems. It also makes the B-2 Spirit stealth bomber and the RQ-4 Global Hawk drone.
Even before its pursuit of Orbital ATK, Northrop had secured $45.3 billion in new orders to be filled over the next few years. To me, that shows that firm has stayed in tune with the Pentagon’s changing needs.
Northrop’s stock is trading around $294, giving it a $51.16 billion market cap. And it’s a strong performer.
Over the past year, the stock is up more than 33%, nearly doubling the S&P 500’s 16.7% return.
I love Northrop Grumman.
But it’s not the only defense stock move savvy tech investors ought to consider.
And this next one is a great way to capture all the big gains we’re seeing coming out of all the mergers and acquisitions occurring among military contractors…
Defense M&A – and a Whole Lot More
The iShares US Aerospace & Defense ETF (AMEX: ITA) owns many, if not most, of the firms involved in these defense industry mergers.
It holds Northrop and Orbital.
And check out these further examples…
Back in November 2015, Lockheed Martin Corp. (NYSE: LMT) scooped up Sikorsky Aircraft Corp., the world’s top producer of helicopters. Both were ITA holdings.
And around a month ago, United Technologies Corp. (NYSE: UTX) shelled out a hefty $23 billion to buy Rockwell Collins Inc. (NYSE: COL). That ranks as one of the biggest deals in aviation history – and both are ITA holdings.
Make no mistake. These deals bring a payoff for investors in both the acquiring and targeted firms. So, with ITA holding 39 of the top defense firms, we profit from both sides of these transactions.
Consider that United Technologies and Lockheed Martin are among the fund’s top holdings. The Boeing Co. (NYSE: BA), with a weight of 10%, is its largest holding.
Boeing needs no introduction – but let’s take a look at a few more key ITA holdings…
Raytheon Inc. (NYSE: RTN) is the world’s largest provider of guided missiles. The combined Northrop Grumman-Orbital ATK will shape up as a formidable competitor. But with a planned $80 billion in new missile defense spending, there’s plenty to go around. Raytheon has a hand in 8,000 unique military programs and is on pace to book nearly $27 billion in new orders this year – ahead of a big surge in defense spending.
L3 Technologies Inc. (NYSE: LLL) is focused on an important defense niche known as Intelligence, Surveillance and Reconnaissance (ISR). The firm has built out its broad set of skills through 83 acquisitions over the past 19 years. And CEO Michael Strianese recently told investors that the Trump administration’s huge defense spending plans should play right into the firm’s hands. L3’s “priority areas,” Strianese says, “include modernized ISR, protected communications, precision-guided munitions, sensor systems, power systems and night vision as well as space and other classified activities.”
Huntington Ingalls Industries Inc. (NYSE: HII). While aerospace accounts for a big part of our nation’s defense policy, don’t forget about our advanced fleet of surface ships and submarines. Huntington Ingalls was spun out of Northrop Grumman in 2011, and it’s the sole designer and builder of U.S. nuclear-powered aircraft carriers. And it’s one of just two firms building out the nation’s fleet of submarines. Fully 70% of the active U.S. Navy fleet was built at Huntington Ingalls’ shipyards. Plus, the U.S. Navy has 275 active ships, many of which are getting modern upgrades from this firm. Vice Adm. Robert Burke, the chief of naval personnel, says the Navy aims to have 350 ships plying global waters a decade from now, which should keep the engineers at Huntington Ingalls very busy.
ITA, which trades at $178 per share, carries a 0.44% expense ratio. That means it meets our “ETF rules.”
Better yet, it makes ITA a cost-effective play on what’s driving the military these days – advanced technology and higher efficiencies through M&A.
The road to wealth is paved by tech.
And so is the greatest military in the world.