Lockheed Martin Corporation
) was awarded a cost-plus-incentive-fee contract worth
approximately $69 million. The U.S. Army Contracting Command,
Redstone Arsenal, Arkansas, is the contracting authority. The award
will provide for the services in support of the PATRIOT Advanced
Capability-3 Missile Segment Enhancement Initial Production
Facilities. Work will be performed in Grand Prairie; Camden,
Arkansas; Lufkin, Texas; and Ocala, Florida. Lockheed Martin
expects to finish work on the contract on July 2, 2014.
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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
Northrop Grumman Corporation