1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
John Engle
John Engle
Articles (593) 

Boeing Faces a Nuclear Threat, Pt. 2

The company makes the case that a Northrop Grumman nuclear monopoly could prove to be a danger to national security

September 27, 2019 | About:

When the Air Force issued the public procurement notice for the Ground Based Strategic Deterrent, its next-generation intercontinental ballistic missile system, it expected bids from the two aerospace and defense companies that have provided ICBM technology for decades: Boeing Co. (NYSE:BA) and Northrop Grumman Corp. (NYSE:NOC).

As we discussed in our last research note on Boeing, things did not end up going as planned. Faced with a seemingly impossible challenge, Boeing decided to withdraw from the bidding process. But that was not the end of the drama. Indeed, the company is now making a last-ditch effort to get back in the running.

From understudy to leading lady

For decades, Boeing has been the senior partner with regard to the U.S. ICBM program. It has been in the leading role for the long-lived Minuteman III ICBM system, with Northrop Grumman playing a supporting, but still very lucrative, role.

Northrop Grumman’s 2017 acquisition of Orbital ATK for $7.8 billion changed the game completely. It has given the company a powerful advantage over all other aerospace industry rivals. Orbital ATK, now known as Innovation Systems, is a dominant producer of ballistic missile solid rocket motors. Boeing lacks this in-house capability.

Boeing’s situation is made even worse by the fact that the only other major U.S. manufacturer of rocket motors, Aerojet Rocketdyne (NYSE:AJRD), has a working relationship with Northrop Grumman. In other words, Northrop Grumman dominates the key technology that will be the core of the GBSD. As a consequence, it has a profound advantage in pricing.

In a somewhat momentous move, Boeing decided to pull its offer entirely, less than a week after the Air Force published its formal call for bids.

It’s about the cost, stupid

Loren Thompson, a Boeing defense industry consultant, explained the decision to withdraw from bidding under the Air Force’s proposed terms:

"Because Northrop owns the biggest maker of solid rocket motors in America, Boeing doesn't think it can price its missiles competitively."

Cost is an overriding concern for the Air Force, more so than in weapons procurement programs of the past. The military is well aware of programs’ tendency to overrun on costs and it has designed the GBSD bidding system to minimize the probability of such a scenario occurring in this instance. In April, Air Force General Timothy Ray argued that competition, combined with strategic reuse of existing missile infrastructure, would result in substantial savings over the long run:

“Our estimates are in the billions of savings over the lifespan of the weapon, based on the insights. Between the acquisition and the deal that we have from a competitive environment, from our ability to drive sustainment, the value proposition that I'm looking at is a two-thirds reduction in the number of times we have to go and open the site. There's a two-thirds reduction in the number of times we have to go and put convoys on the road.”

The inability to compete on price is a classic problem facing private sector companies. However, in the defense industry, which relies on a small oligopoly of component and systems suppliers, competition tends to take a different shape. Usually, more than one company can cobble together a competitive bid, no matter the particular circumstances. In the case of the GBSD, however, the Air Force’s specifications – especially its critical focus on cost – made for an almost unwinnable fight for Boeing.

With Northrop Grumman effectively cornering the U.S. rocket motor sector ahead of the GBSD bidding, Boeing found its position untenable. Thus, it chose to pull its bid. But that did not mean it had stopped fighting for the prize.

Boeing fights back

Boeing is not going down without a fight. It is now attempting to force the Air Force to alter its procurement order in order to give it a better shot. Alternatively, it has argued that Northrop Grumman should be compelled to partner with Boeing to develop the GBSD. Boeing’s argument boils down to a contention that if Northrop Grumman is the sole recipient of the GBSD contract, it will have a dangerous monopoly on a technology that is critical to national defense.

On Sep. 18, Frank McCall, manager of Boeing’s GBSD program, lambasted the Pentagon’s bidding process:

“Northrop is on a path to a sole-source opportunity. There has never been a time in the history of the Minuteman when the Air Force wasn’t supported by both companies… A winner-take-all approach [is] unprecedented in the history of intercontinental ballistic missiles.”

This was not the first time Boeing has attempted to play the monopoly card. In July, Boeing consultant Loren Thompson told the Washington Post that Northrop Grumman was on the verge of dominating two legs of America’s nuclear triad:

“Loren Thompson, a defense consultant who works with Boeing, said Northrop Grumman is now ‘headed for a monopoly’ on the air-, land- and sea-based legs of the United States’ nuclear strike capability. Northrop makes the solid rocket motors on the Navy’s sub-launched missiles, and it also holds the contract to build the Air Force’s B-21 bomber. ‘One company would have a monopoly on the nuclear deterrent,’ Thompson said. 'I just don’t see Congress being comfortable with that.’”


In 2018, the White House published a report that identified 300 cases in which important defense products are left in the hands of a single private sector supplier, a foreign supplier or a “fragile” supplier. A robust national defense strategy may seem to be flawed if it rests its hopes in a single supplier for vital components or systems, yet this has been the norm across a myriad of technologies. That gives Boeing some room to maneuver. It has spent more than $8 million on Washington lobbying efforts in 2019 already, and it appears to be ramping up its efforts to save its faltering GBSD hopes.

America’s nuclear deterrent is, in many ways, a category unto itself. As a consequence, Boeing’s protestations may yet find a sympathetic ear in Washington. So far, it has had little luck convincing the Federal Trade Commission of its cause. Congress may be another matter.

Ultimately, Boeing is skating on thin ice with regard to the $85 billion GBSD program. Losing out entirely would be both embarrassing and costly to the venerable aerospace and defense company.

Disclosure: Author is short Boeing.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

Rating: 4.0/5 (1 vote)



Please leave your comment:

Performances of the stocks mentioned by John Engle

User Generated Screeners

wigbertHigh FCF-M2
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)