Back to top

Analyst Blog

The Australian affiliate of Northrop Grumman Corporation – Northrop Grumman Australia Pty Limited – announced plans to acquire the defense unit of Australia’s Qantas Airways Limited. The parties did not disclose the terms of the transaction.

The acquisition of Qantas Defence Services Pty Limited or QDS – scheduled to close by next year – is subject to customary closing conditions.

QDS has a long standing relationship with the Australian government and defense units with its integrated logistics, sustainment and modernization support. With 300 and more employees working throughout Australia this unit provides support to the Australian Air Force's tanker-refueling fleet, logistics services to the government’s VIP aircraft and Navy patrol planes.

Importantly, QDS recently received an Indonesian contract to refurbish four Lockheed Martin Corp. C-130H military aircraft. These transport planes were previously operated by the Royal Australian Air Force.

The QDS acquisition is expected to play an important role in Northrop Grumman’s international growth in its specialized areas of unmanned, C4ISR, cyber, and logistics and modernization. This major defense contractor is currently lagging behind its U.S. rivals in terms of international contract wins. 10% of Northrop Grumman’s 2012 revenues were from overseas military customers, much lower than its peers.

Given the current budget sequestration in the U.S., the latest deal marks Northrop Grumman’s attempt to tap into the faster-growing international defense markets of Asia and Australia.

Last month, the company posted strong second quarter 2013 results on the back of a lower share count and a strong operating performance. Revenue and earnings growth continued to be driven by its strong presence in the current focus areas of cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance systems, advanced electronics and software development.

The company has conceded that though the budget environment is unpredictable, it will continue to focus on aligning its portfolio with the priority areas of investment for global security. Again, while the company’s Global Hawk program is maturing, it continues to progress well on other unmanned programs, such as Alliance Ground Surveillance and Fire Scout program.

The positives are well reflected in the company’s bullish Zacks Rank #2 (Buy). Other well-placed stocks in the space include Alliant Techsystems Inc. and Huntington Ingalls Industries, Inc. . While Alliant Techsystems carries a Zacks Rank #1 (Strong Buy), Huntington Ingalls holds a Zacks Rank #2 (Buy).

Please login to Zacks.com or register to post a comment.