Northrop Grumman to Hackers: Can You Crack Me Now?

China's alleged hack of Lockheed's F-35, like the one seen here, are poignant reminders of why cyber security is important. Photo: Northrop Grumman Media.

Earlier this year, Chinese spies allegedly hacked Lockheed Martin's (NYSE: LMT  ) F-35 program, along with more than two dozen weapons systems. Further, last October the Defense Science Board found that the Department of Defense, and its contractors, had sustained "staggering losses," allowing adversaries to develop countermeasures to America's advanced weapons systems. 

Reports such as these are concerning on a number of levels. Luckily, Northrop Grumman (NYSE: NOC  ) is developing award-winning solutions to these weaknesses. For investors, this is especially welcome news.

Accolades equal profit
Earlier this month, Northrop, along with the partnering Virginia Information Technologies Agency, received the Cybersecurity Integration Partnership Award for their work in decreasing cyber attacks at the state level. Further, the Center for Digital Government, the agency that awarded the prize, said the partnership between the state and Northrop is "transforming state government's IT infrastructure technology." Even better for investors? The 13-year contract between Northrop and the state is worth $2.3 billion.  

Additionally, in August, Northrop, along with Lockheed, General Dynamics (NYSE: GD  ) , Booz Allen Hamilton Holdings (NYSE: BAH  ) , Computer Sciences (NYSE: CSC  ) , and 12 other vendors won a share in the Department of Homeland Security's $6 billion defense contract to develop checks for federal and state agencies. More pointedly, this is one of the U.S. government's largest unclassified cyber security programs. 

Sequestration forces a squeeze, but cyber security is more important
According to its latest quarterly report, dated June 30, Northrop's backlog declined to $37.7 billion, compared with $40.8 billion as of Dec 31, 2012. The main reason? Reduced government spending, thanks in large part to sequestration. 

Further, Northrop's Information Systems division backlog, under which cyber security falls, declined from $8.5 billion last December to $7.07 billion in June -- however, that includes a $1 billion adjustment primarily to reduce unfunded backlog for expired periods of performance on active contracts, including task orders on indefinite delivery/indefinite quantity contracts. 

At first brush, that doesn't look great. However, keep in mind that almost every government contractor is experiencing reduced spending. Second, according to Info Security, "IT security spending represents a $12bn market, or 15% of the federal government's overall IT budget." It also reported that there's been a 600% increase in cyber threats, as observed by the United States Computer Emergency Readiness Team, or US-CERT. Moreover, Market Research Media stated that starting in 2013, "With a cumulative market valued at $65.5 billion (2013-2018), the U.S. Federal Cybersecurity market will grow steadily -- at about 6.2% CAGR [compound annual growth rate] over the next six years."  

What this means
Defense contractors are hurting right now, and Northrop is no exception. However, it's in a great position to reap increased spending on cyber security initiatives. Further, while Northrop did experience a decline in its information-systems backlog, $7.07 billion is still a healthy amount of money. Consequently, Northrop could make a great addition to your long-term investing portfolio.

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