Jefferies: Orbital ATK Acquisition Strengthens Northrop Grumman

The case for buying Northrop Grumman Corporation NOC's stock was solidified after the company was green-lighted by European regulators to acquire Orbital ATK Inc OA, according to Jefferies.

The Analyst

Jefferies' Sheila Kahyaoglu upgraded Northrop Grumman's stock rating from Hold to Buy with a price target boosted from $345 to $400.

The Thesis

Under a base case scenario, the combination of Orbital ATK into Northrop Grumman's business will generate an incremental $1.75 per share to 2020 earnings which implies 9-percent accretion, Kahyaoglu said in a Tuesday note. (See the analyst's track record here.)

If the deal generates $200 million — or 5 percent — in cost synergies and accelerated revenue growth, the deal could add as much as $2.30 per share in 2020, Kahyaoglu said. 

The addition of Orbital ATK to Northrop Grumman's business gives it a competitive position on the Ground Based Strategic Deterrent program, an $85-billion initiative to modernize intercontinental ballistic missiles that could be worth $15 per share alone, the analyst said. Orbital ATK would provide the necessary propulsion capacity, as it boasts a "100-percent success rate with its propulsion offering for strategic production motors, which can be applied to other programs which require strategic propulsion systems.

Price Action

Shares of Northrop Grumman were trading higher by 1.14 percent Wednesday afternoon.

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Photo courtesy of the U.S. Air Force via Wikimedia.