Lockheed Martin Corporation
(
LMT
) was awarded a $13.3 million contract for fiscal 2012 Acoustic
Rapid Commercial-Off-The-Shelf Insertion (A-RCI) TI-12 system
upgrades. The U.S. Naval Sea Systems Command, Washington,
D.C., is the contracting authority.
The contract provides funding for the development and
production of the A-RCI and common acoustics processing for the
U.S. submarine fleet. Work on the contract will be performed in
Manassas, Virginia (60%), and Clearwater, Florida (40%). Lockheed
expects to finish work on the contract by January 2014.
Lockheed Martin is the largest U.S. defense contractor with a
platform-centric focus that guarantees a steady inflow of
follow-on orders from a leveraged presence in the Army, Air
Force, Navy and IT programs. We expect the company to benefit
from a strong defense focus on a number of its platform programs,
such as the C-130 Hercules & C-5 Galaxy transport aircraft,
F-16 Fighting Falcon multi-role jet, MH-60 Helicopters, the
Advanced Extremely High Frequency & the Global Positioning
Satellite III system satellites, the Littoral Combat Ship, and
the Aegis Weapons System.
Going forward, we believe Lockheed Martin has significant
upside potential based on the Obama administration's focus on
Intelligence Surveillance Reconnaissance (ISR), unmanned systems,
force protection, cyber-security and missile defense. It was
already sitting on an order backlog of approximately $75.6
billion at the end of the first nine months of 2012.
Lockheed Martin has one of the strongest balance sheets among
its peers with a stable long-term debt-to-capitalization of 78.0%
after the end of the first nine months of 2012. Lockheed
continues to be a strong cash generator with its operating cash
flow reaching approximately $4.3 billion during fiscal 2011.
Management is also prudent of returning a substantial portion of
its free cash flow to shareholders through share repurchases and
incremental dividends. The company closed the first nine months
of 2012 with cash and cash equivalents of $4.7 billion, and a
$1.5 billion revolving credit facility expiring in August 2016.
Total long-term debt of approximately $6.4 billion was mainly in
the form of fixed interest bearing securities (notes and
debentures).
On the flip side, we must remember that a large percentage of
Lockheed Martin's business comes from the U.S. government (82% of
sales in 2011). Budget deficits and political uncertainty make
future defense budgets vulnerable to cutbacks. Going forward,
Pentagon is seeking to trim about $487 billion in defense
spending over 10 years to meet deficit reduction targets. Also,
U.S. economic fundamentals are basically being kept on a tight
leash as the Euro-crisis continues to cast its spell over
financial markets, risking further cutbacks in future defense
budgets.
We are apprehensive about the $15 trillion national debt and
an unemployment rate of around 7.7% that would lead to the Budget
Control Act's dictum of automatic cutbacks across the board going
forward. This would not result in anything extra for defense
goliaths in general and Lockheed Martin in particular.
Given the budgetary cuts and overall scenario, it would not be
too pessimistic to advise investors to adopt a wait-n-watch
approach for the defense and aerospace major. Thus, considering
the company's business model and fundamentals, we maintain our
long-term "Neutral" recommendation on the stock. The company
holds a Zacks Rank #3 (Hold) rating, which translates into a
short-term Hold rating, and correlates with our long-term
recommendation. This is in sync with its peers like
The Boeing Company
(
BA
) and
Northrop Grumman Corporation
(
NOC
).
Over the longer run, we expect the company to register a
stable performance given its diversified presence in a plethora
of defense platforms and IT know-how. Also, shareholder return
will continue to be shored up by the company's focus on debt
repayment, its ongoing share repurchase program and the
incremental dividend.
BOEING CO (BA): Free Stock Analysis Report
LOCKHEED MARTIN (LMT): Free Stock Analysis
Report
NORTHROP GRUMMN (NOC): Free Stock Analysis
Report
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