Where Defense Companies Are Ahead Of The Curve

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

President Obama recently issued an executive order to boost cybersecurity in the United States. From all of the big cyber attacks that have made the news lately, it seems that this nation's lawmakers are well behind the curve on this issue. Obama was right to act and to request further moves from Congress. Interestingly, however, defense companies are already way out in front on this issue.

Cyber War

The list of companies that have had their computer systems compromised by cyber attackers is nothing short of impressive. Most recently it has included The New York Times and The Wall Street Journal. Major banks, including Citibank and Bank of America have also been targeted. So, too, has the Federal Reserve.

These are not minor threats. Years ago a hacker would have simply put up what amounted to cyber graffiti. Today, such attacks often lead to malicious computer programs that can take down systems and destroy computers. Worse, there are major accusations that these attacks are being directed by foreign governments, particularly China. Of course, the United States, in conjunction with Israel, stands accused of such an attack on Iran.

That attack, to hinder Iran's progress toward nuclear weapons, was legitimate and necessary. Funny, Iran doesn't see it that way and is calling for an international cyber law of some sort. But that's the problem, when is it OK and when isn't it OK? It depends on the side you're on.

Behind the Curve

The risk of a cyber attack has been well known for years. Much of our country's infrastructure is privatized. Certainly some of the most vulnerable, and often most important, infrastructure is, such as electricity and communications. If a country were to take down the electric grid it would be chaos.

There are plenty of companies out there that focus on cyber threats. Sourcefire (NASDAQ: FIRE), for example, provides cybersecurity solutions to large- to mid-size organizations and government agencies. The company recently launched what it calls an “Incident Response” team service. This new service helps customers “leverage the intelligence” the company's solutions provide to “make more informed security and incident response decisions.” Clearly the company sees the problem and knows it has to do more, or at least capitalize on the current threats. Fortinet (NASDAQ: FTNT) also provides network security to companies and governments.

However, that so many major companies have had their networks violated suggests that there is still a lot of work to be done.

Ahead of the Curve

One industry that's been thinking about this issue for years and is well prepared for it is the military/industrial complex. These companies make systems for the U.S. military that have to be protected to a degree that is well beyond what companies need. Branching further out into this space with their products could be a huge benefit to these entities. Some worth looking at are:

Northrup Grumman (NYSE: NOC)

The times are changing, and so is Northrop Grumman. Like most of the other defense contractors, the company has its fingers in a lot of pies. However, today, cybersecurity is the second item on the company's list of capabilities. The list starts with unmanned drones, another particularly hot area right now. Regardless, Northrop's management clearly has their head around the importance of cybersecurity.

Two areas of focus at Northrup worth noting are critical infrastructure protection and cloud security. Both of these are going to be increasingly important in the years ahead, with Obama's call specifically highlighting infrastructure and the obvious push that is being made to move computing into the cloud. For example, Netflix, which uses Amazon's cloud services, had an outage late last year that pretty much took the service down. While that was not related to a cyber attack, it could easily have been.

A close to 3.3% yield and strong financial profile make Northrup an interesting choice for investors looking to benefit from cybersecurity.

Lockheed Martin (NYSE: LMT)

Like Northrop, Lockheed Martin is a massive player in the defense arena. Although it doesn't put its cyber capabilities front and center, they are prominently highlighted under the company's Information Technology services. From securely testing wireless systems to its cyber forensics lab, Lockheed is a leader in the cyber ware space.

The forensics lab, in fact, is an interesting capability. It puts the company in line to benefit from analyzing hacking attacks and from protecting against such attacks. It also gives the company a key role in learning what is going on when attacks take place.

Lockheed has been aggressively returning value to shareholders in recent years, with over a decade of dividend increases under its wings and an over 5% dividend yield. Dividend investors should definitely be looking at this company.

It's War

The companies working on cybersecurity issues are good at what they do, there's no question. Military suppliers have to be better. While there are the looming budget cuts to military spending, this is one area that won't see as much trimming and might actually see more demand from the corporate front.

Yours,
 

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Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Netflix, and Sourcefire. The Motley Fool owns shares of Amazon.com, Bank of America, Citigroup Inc , Lockheed Martin, Netflix, and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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