Lockheed Martin Corporation
) won a $152 million, five-year contract from the U.S. Air Force to
help the force transition its legacy Sniper pod sustainment support
from Wright Patterson Air Force Base in Ohio to Warner Robins Air
Force Base in Georgia.
Further, Lockheed added that it may also provide services like
engineering support, initial line replaceable unit spares, support
equipment and pod containers to the Air Force.
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.
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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