Summary
- Aerospace and Defense is one of the best historical performers in the market.
- Oligopolies make for terrific investments.
- Northrop Grumman is one of the all-time great American companies that can be had for a value price.
- Selling naked puts against it is a fine way to generate income and possibly have the stock put to you below intrinsic value.
Thesis
Let's talk aerospace and defense.
The sheer complexity of every element of these sectors, in terms of actually building stuff that works and has no margin of error for failure, is impossible to conceive for us mere mortals.
All of the things that go into making a plane fly, a missile soar, and spaceships launch are truly miracles of human ingenuity that remain unparalleled achievements in human history.
Engineering, physics, mathematics, construction, metallurgy, logistics… it's impossible to name all the disciplines and expertise that create these strange objects that transport people and wage war.
Which is why this sector is effectively an oligopoly, although it has a few more players than most oligopolies. That also means there is an extraordinarily high barrier to entry. It's also far too late for new players to enter the game in any large way. Only small firms with expertise in a niche can get in.
Defense and aerospace are an essential part of every developed nation. In America, national security eats up a huge part of the federal budget even in peacetime and even with dovish administrations. Simply put, America does not exist without these sectors.
We've learned that while it stinks not to be able to go to restaurants, we don't need them. We will always need aerospace and defense.
Northrop Grumman (NOC) is an 81-year-old company that specializes in security and defense. Remember a few paragraphs ago where we described, in general, the complexity of this business. Read this description of everything NOC does and be awed:
Northrop Grumman Corporation provides various systems, products, and solutions in autonomous systems, cyber, space, strike, and logistics and modernization, as well as in command, control, communications and computers, intelligence, surveillance, and reconnaissance (C4ISR). It designs, develops, integrates, and produces manned aircrafts, autonomous systems, spacecraft systems, high-energy laser systems, microelectronics, and other systems and sub-systems for use in the areas of intelligence, surveillance and reconnaissance, strike operations, communications, earth observations, and space science. The company also designs, develops, integrates, and produces flights, armaments, and space systems to enable national security, civil government, and commercial customers in achieving their critical missions. Its space systems include launch vehicles and related propulsion systems; missile products and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and aerospace structures. In addition, it offers C4ISR systems; radar, electro-optical/infrared, and acoustic sensors; electronic warfare systems; cyber solutions; space and intelligence processing systems; air and missile defense integration systems; navigation systems; and shipboard missiles and encapsulated payload launch systems. Further, the company provides life-cycle solutions and services in support of networks and systems, including sustainment, modernization, training and simulation, software, engineering services, cyber, rapidly-deployable global logistics, and information technology.
Now sit back and just think about how mind-numbingly brilliant all of NOC's employees must be to make all this… stuff. Then think about the fact that it all works. Then you'll understand why NOC has generated over $140 billion in revenues over just the past five years, and some $13 billion in profit.
