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Northrop Grumman Corp NOC

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Northrop Grumman Sells IT Services Business in Moat-Accretive Deal

Burkett Huey, CFA Equity Analyst

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.

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Company Profile

Business Description

Northrop Grumman is a defense contractor that is diversified across short-cycle and long-cycle businesses. The firm’s segments include aeronautics, mission systems, defense services, and space systems. The company’s aerospace segment creates the fuselage for the massive F-35 program and produces various piloted and autonomous flight systems. Mission systems creates a variety of sensors and processors for defense hardware. The defense systems segment is a mix between a long-range missile manufacturer and a defense IT service provider. Finally, the company’s space systems segment produces various space structures, sensors, and satellites.

2980 Fairview Park Drive
Falls Church, VA, 22042
T +1 703 280-2900
Sector Industrials
Industry Aerospace & Defense
Most Recent Earnings Sep 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type Cyclical
Employees 90,000