Lockheed Martin Corporation
(
LMT
) has received an indefinite delivery/indefinite quantity Sniper
Advanced Targeting Pod ('ATP') Post Production Support ('PPS')
contract from the U.S. Air Force. The potential value of the
contract over a seven-year period is $841 million.
This PPS contract, to be awarded incrementally over five years,
with two single option years, covers a variety of upgrade
activities for the legacy Sniper ATP fleet, including hardware and
software upgrades and platform integration. This includes
transition of legacy pods into the Advanced Targeting Pod-Sensor
Enhancement configuration. Additionally, the PPS contract may
include spares, technical data and studies, and the support of
organic depot requirements for Sniper pod sustainment.
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 (
ISR
), unmanned systems, force protection, cyber-security, and missile
defense. It already sits on an order backlog of approximately $80.7
billion at the end of the fourth quarter of 2011.
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.
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
leash as the Euro-crisis continues to cast its spell over financial
markets, risking further cutbacks in future defense budgets.
Lockheed is also worried about the future of the F-35 Joint
Strike Fighter. The F-35 is Pentagon's biggest weapons program, at
an estimated cost of $382 billion, for development and purchase of
planes. The downsized defense budget aims to wriggle out most of
the savings from this program.
The budget proposal for fiscal 2013 suggests a deduction of $1.6
billion from the F-35 program by eliminating 13 planned aircrafts.
The budget proposal provides $9.17 billion for 29 F-35 aircrafts,
two less than what was sanctioned for fiscal 2012. There are also
proposals to delay the procurement plan under the F-35 program,
reducing its planned purchase order from 423 to 244 during the
period between fiscals 2013 to 2017.
The U.S. Defense Department estimates that this would bring in a
total of $15.1 billion in savings. Any more snips at the F-35
program would greatly affect the fortunes of the world's largest
stand-alone defense company. The scissors are at work on Lockheed's
Thaad missile interceptor program as well, which at a conservative
estimate would bring in $1.8 billion in savings through 2017.
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 maintain our 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 Report
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