Northrop to Acquire M5 Network

Northrop Grumman Corporation (NOC - Analyst Report) announced that it has signed a definitive agreement to acquire privately held M5 Network Security Pty Ltd.

M5 Network Security is a Canberra, Australia-based provider of cybersecurity and secure mobile communications products and services, and advanced analytics to Australian military and intelligence organizations. The acquisition is however subject to the approval of the Australian government. The company expects to complete the transaction by fiscal-end 2012.

The acquisition would enhance Northrop’s Australian market exposure in the fields of cybersecurity and communication solutions.

Los Angeles-based Northrop Grumman Corporation is one of the largest defense contractors in the U.S. The company supplies a broad array of products and services to the U.S. Department of Defense (DoD), including electronic systems, information technology, aircraft, space technology and systems integration services. The positive case for Northrop Grumman stems from revenue growth across the board and a broad diversification of programs.

Northrop Grumman offers a strong program portfolio positioned to take advantage of focus areas in the defense space, an improving balance sheet and an ongoing share repurchase program. Also, its product line in high priority categories, such as defense electronics, unmanned aircraft and missile defense, gives Northrop Grumman an edge over competition.

The company’s backlog is expected to see further upside in the near future through unmanned aerial vehicle (UAV) platforms, including Broad Area Maritime Surveillance (BAMS), Fire Scout and Navy Unmanned Combat Air System (UCA). Thus, the quantitative Zacks # 2 Rank (short-term Buy rating) for the company indicates upward directional pressure on the shares over the near term.

However, these are offset by apprehension regarding defense cutbacks on high-cost platform programs, over-exposure to the DoD budget, lower backlog, cost over-runs and reductions in Afghanistan and Iraq operations.

We maintain our long-term ‘Neutral’ recommendation on Northrop Grumman. This is in line with its peers like General Dynamics Corporation (GD - Analyst Report) and Lockheed Martin Corporation (LMT - Analyst Report).