Lockheed Martin Corporation
) has received a $111 million Modernized Target Acquisition
Designation Sight/Pilot Night Vision Sensor (M-TADS/PNVS)
Performance Based Logistics ("PBL") contract from the U.S. Army.
The PBL contract is a firm-fixed price, comprehensive sustainment
solution that enables mission readiness, reduces Operations and
Support (O&S) costs and drives reliability and maintainability
improvements. The contract consists of a one-year base and three
one-year options extending through December 2015. The total
four-year contract value is $375 million.
M-TADS/PNVS modernizes the U.S. Army's TADS/PNVS by upgrading the
infrared sensors and associated electronics. M-TADS/PNVS provides
Apache pilots with the most advanced long-range, electro-optical
precision engagement and pilotage capabilities to ensure mission
success and flight safety in day, night and adverse-weather
The U.S. defense budget for 2012 was $645.7 billion, with the base
budget at $530.6 billion and $115.1 billion approved for Overseas
Contingency Operations ("OCO") as supplementary defense spending,
mainly to fund ongoing wars. In February this year, the Department
of Defense ("DoD") requested a Pentagon base budget of $525.4
billion for 2013, which is approximately $5.1 billion or 1% less
than what is approved for fiscal 2012, with $88.5 billion earmarked
for OCO spending.
In early August 2012, the subcommittee recommended $511 billion for
DoD's base budget and $93 billion for OCO spending, for a total of
$604.5 billion for fiscal 2013.
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, cybersecurity, and missile defense. It already sits on
an order backlog of approximately $75.5 billion at the end of the
first half of 2012.
Of this, $26.9 billion belonged to the Aeronautics segment and
$24.6 billion to the Electronic Systems segment. The rest is made
up of $15.7 billion for the Space Systems segment and $8.3 billion
for Information Systems & Global Solutions.
We currently maintain our long-term Outperform recommendation on
Lockheed Martin based on revenue growth, improved earnings
guidance, incremental dividend payout and stable order backlog. The
company's second quarter adjusted earnings surpassed the Zacks
Consensus Estimate and improved year over year, primarily on strong
numbers from Aeronautics, Electronic Systems and Space Systems
Going forward, we believe the current discounted valuation of the
defense behemoth versus its peers like
The Boeing Company
Huntington Ingalls Industries Inc.
) is unwarranted given its leveraged presence in the Army, Air
Force, Navy and IT programs.
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. Thus, Lockheed Martin carries
a Zacks #2 Rank implying a short-term Buy rating for the next 1-3
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