We have maintained our Neutral recommendation on the world's
largest stand-alone defense contractor,
Lockheed Martin Corporation
), on Nov 18, 2013.
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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
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.
Huntington Ingalls Industries, Inc.
Northrop Grumman Corp.
), all with a comparable Zacks Rank #2 (Buy).