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
).
BOEING CO (BA): Free Stock Analysis Report
LOCKHEED MARTIN (LMT): Free Stock Analysis
Report
NORTHROP GRUMMN (NOC): Free Stock Analysis
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