Lockheed Gets MDA Contract - Analyst Blog

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Lockheed Martin Corporation ( LMT ) received an undefinitized contract action (UCA) at a total not-to-exceed price of $2,023,590,000 from the Missile Defense Agency or MDA. This award is made under the existing Terminal High Altitude Area Defense (THAAD) production contract. Under this contract, Lockheed Martin will supply a minimum of 42 THAAD interceptors. 

The U.S. government intends to combine this procurement with a previously announced Foreign Military Sales for the United Arab Emirates procurement of 96 interceptors, in order to gain synergy cost savings. This work will be done in Sunnyvale, California, with final assembly performed in Troy, Alabama. The MDA, THAAD Program Office, Redstone Arsenal, Alabama, is the contracting activity.

Lockheed Martin is the largest U.S. defense contractor with a platform-centric focus and a steady inflow of follow-on orders due to its leveraged presence in the Army, Air Force, Navy and IT programs. However, the ongoing trend of governmental delays in program decisions coupled with program cancellations has affected the fortunes of the defense industry in general and Lockheed Martin in particular.

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 aircrafts, 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, unmanned systems, force protection, cyber-security, and missile defense. It already sits on an order backlog of approximately $76.6 billion at the end of the first quarter of 2012.

On the flip side, we must remember that a large percentage of Lockheed Martin's business comes from the US government (82% of sales in 2011). Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks.

In the long term, 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 leash as the Euro crisis continues to cast its spell over financial markets, risking further cutbacks in future defense budgets.

However, we believe market pessimism is fully accounted for in the current valuation of the company, which is priced at a discount to both industry peers and the overall market. In view of these factors, we currently remain on the sidelines on Lockheed Martin. 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 goliath. This justifies the Zacks #3 Rank, which translates into a short-term "Hold" recommendation.

Considering the company's business model and fundamentals, we have a long-term "Neutral" recommendation on the stock. This is in sync with its peers like The Boeing Company ( BA ) and Northrop Grumman Corporation ( NOC ).


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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Referenced Stocks: BA , LMT , NOC

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