Yesterday, Northrop Grumman NOC announced its intention to consolidate its Gulf Coast shipbuilding operations and to explore strategic alternatives for the shipbuilding business. Under this plan, the firm will close its Avondale facility in 2013, following the construction of LPD 23 and 25, and consolidate future ship building in Pascagoula, Mississippi. Seeing few synergies between shipbuilding and the rest of its operations, the firm intends to either sell or spin off this division. The firm will incur a $113 million charge in the second quarter due to the consolidation. However, the firm also will receive a $296 million tax benefit, resulting in a net benefit of $0.73 per share.
We think Northrop is taking the right steps in consolidating its Gulf Coast operations. In the face of declining defense budgets and poor profitability at its shipbuilding operations, reducing capacity is the right decision. Consolidating the operations will reduce overhead and improve the mid-single-digit margins the firm delivers today.
Our opinion of the firm's exploring strategic alternatives for its shipbuilding business is mixed. While we agree that the firm realizes few synergies between shipbuilding and the rest of its business, we also recognize that Northrop owns a unique asset in its shipbuilding facilities, with General Dynamics GD offering the only competition. While this space will see little or no growth going forward, the U.S. continues to rely on its naval vessels to project power. Thus, the U.S. Navy calls for a fleet size of around 300 ships during the next 30 years or so, spending $15.9 billion in annual procurement during this period. Given the strategic importance of maintaining a minimum fleet size and Northrop's leading position in shipbuilding, this division should enjoy a stable revenue stream. Current margins in this unit languish in the midsingle digits, but cost reductions, like the announced Gulf Coast consolidation, should improve margins. The unique nature of the asset base and the strategic importance of the unit to the U.S. DoD lead us to believe this division would be an attractive addition to any defense portfolio, and we are not entirely convinced of the wisdom of Northrop's decision to eliminate this unit.
Despite this announcement, the sale/spin-off scenario will take several quarters to play out, and we are maintaining our valuation. We will wait for Northrop to decide on a specific path before re-evaluating our fair value estimate of the firm.
We think Northrop is taking the right steps in consolidating its Gulf Coast operations. In the face of declining defense budgets and poor profitability at its shipbuilding operations, reducing capacity is the right decision. Consolidating the operations will reduce overhead and improve the mid-single-digit margins the firm delivers today.
Our opinion of the firm's exploring strategic alternatives for its shipbuilding business is mixed. While we agree that the firm realizes few synergies between shipbuilding and the rest of its business, we also recognize that Northrop owns a unique asset in its shipbuilding facilities, with General Dynamics GD offering the only competition. While this space will see little or no growth going forward, the U.S. continues to rely on its naval vessels to project power. Thus, the U.S. Navy calls for a fleet size of around 300 ships during the next 30 years or so, spending $15.9 billion in annual procurement during this period. Given the strategic importance of maintaining a minimum fleet size and Northrop's leading position in shipbuilding, this division should enjoy a stable revenue stream. Current margins in this unit languish in the midsingle digits, but cost reductions, like the announced Gulf Coast consolidation, should improve margins. The unique nature of the asset base and the strategic importance of the unit to the U.S. DoD lead us to believe this division would be an attractive addition to any defense portfolio, and we are not entirely convinced of the wisdom of Northrop's decision to eliminate this unit.
Despite this announcement, the sale/spin-off scenario will take several quarters to play out, and we are maintaining our valuation. We will wait for Northrop to decide on a specific path before re-evaluating our fair value estimate of the firm.