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Northrop Buys M5 Network Security

NOC GD

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Northrop Grumman Corporation (NOC - Analyst Report) has closed the acquisition of M5 Network Security Pty Ltd. for an undisclosed amount. Canberra, Australia-based, M5 Network Security Pty Ltd. provides cyber security and secure mobile communications products and services.

M5 Network Security endows Australian military and intelligence organizations with advanced analytics. The acquisition would enhance Northrop's Australian market exposure in the fields of cyber security and communication solutions.

The aerospace companies seem to be involved in acquiring companies that provide cyber security tools and services. Recently, one of the company's peers General Dynamics Corporation (GD - Analyst Report) also completed the acquisition of Fidelis Security Systems, Inc. Fidelis is a market leader in cyber security tools that provide real-time network visibility, analysis and control. Its network security solutions assist customers in preventing advanced threats and data breaches.

Northrop Grumman is a leading global security company providing innovative systems, products and solutions in aerospace, electronics, information systems, and technical services to government and commercial customers worldwide. At the end of the second quarter of 2012, cash and cash equivalents were $3.1 billion, up from $2.8 billion in the second quarter of 2011. Cash provided by (used in) continuing operations during the quarter was $876 million versus ($34) million in the year-ago period.

Going forward, Northrop Grumman's strong balance sheet and cash flows provide substantial financial flexibility and a cushion for improving shareholder value through incremental dividend, ongoing share repurchases and earnings accretive acquisitions.

Recently, the company had also authorized an increase in the company's outstanding share repurchase authorization to $2 billion of common stock. As of June 30, 2012, Northrop Grumman had 248 million shares outstanding and $1.1 billion remaining under its share repurchase authorization.

Moreover, Northrop has a strong presence in Air Force, Space & Cyber Security programs. Revenue and earnings growth continue 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.

However, we expect these positives to be 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 the Afghanistan and Iraq operations. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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