Lockheed Martin Stays Neutral - Analyst Blog

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We have maintained our Neutral recommendation on the world's largest stand-alone defense contractor, Lockheed Martin Corporation ( LMT ), on Nov 18, 2013.

Why Kept at Neutral?

Lockheed Martin has succeeded in beating the top as well as the bottom line in its third quarter 2013 earnings release. Also, the company continued to grow its backlog and generate strong cash from operations while maintaining its cash deployment strategy.

Despite the uncertainty plaguing the industry, the company has been able to generate $15 billion in orders during the third quarter. Going forward, the diverse product offerings, strong program execution and cost reduction measures will help the company to sustain its profitability.

The strong performance in the quarter prompted management to raise its full year earnings guidance to $9.40-9.70 per share (up from $9.20-9.50 per share). A key catalyst is the F-35 program, which is expected to account for approximately 16% of 2013 revenues. The growing international mix is also expected to increase to about 15% in 2014.

Notably, Lockheed Martin is expected to win a sizeable contract from South Korea for 40 of its F-35 Joint Strike Fighters. Although South Korea's Defense Ministry did not clearly specify Lockheed Martin as the winner, the country's need of the hour to beef up its stealth capability leaves the company's F-35A stealth jet as the only viable contender in response to North Korea's growing nuclear threat.

This deal from South Korea for its super stealth fighter would mark a crucial victory for Lockheed Martin in response to Pentagon's budget cuts and delay in buying new jets. So far as countering the adverse effects of defense budget cuts and sequestration, the share price of Lockheed Martin hit a 52-week high of $140.94 on Nov 22.

On the flip side, a large percentage of Lockheed Martin's business comes from the U.S. government (82% of sales in 2012). Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks. The 2013 sales guidance is now at the low end of the previously announced range of $44,500 million to $46,000 million and management expects revenues to decline year over year in 2014 to account for the impact of sequestration.

Given the lower government spending on defense, Lockheed Martin is expected to trade in line with the broader market indices.

Other Stocks to Consider

Lockheed Martin currently carries a Zacks Rank #2 (Buy). Other defense stocks also worth considering include The Boeing Co. ( BA ), Huntington Ingalls Industries, Inc. ( HII ) and Northrop Grumman Corp. ( NOC ), all with a comparable Zacks Rank #2 (Buy).

BOEING CO (BA): Free Stock Analysis Report

HUNTINGTON INGL (HII): Free Stock Analysis Report

LOCKHEED MARTIN (LMT): Free Stock Analysis Report

NORTHROP GRUMMN (NOC): Free Stock Analysis Report

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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 Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: BA , HII , LMT , NOC

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