Analyst Note| Burkett Huey, CFA |
Wide-moat-rated Northrop Grumman reported on Dec. 7 that it would sell its IT and mission support service business for $3.4 billion in cash to private equity at a price/2020 sales multiple of just under 1.5 times. Northrop intends to use the proceeds to repurchase shares and retire debt, which we think is a sensible use of capital, given the near-term uncertainty in defense spending. This deal follows an industrywide trend of divesting services operations. Lockheed Martin and L3 before its merger with Harris also chose to sell these operations. We think the deal makes sense strategically, and the multiple looks to be about the market price for a government IT services business. We are increasing our fair value estimate by $1, to $338 per share, as we incorporate the news into our model.