We maintained our long-term Neutral recommendation on
aerospace and defense major
Lockheed Martin Corporation
) on May 10, 2013. The company's first quarter 2013 results and
its leveraged presence in the Army, Air Force, Navy and IT
programs are somewhat undermined by its operational dependency on
the US government and cuts in defense spending.
Why Kept Neutral?
The world's largest U.S. defense contractor, Lockheed Martin
reported strong first quarter 2013 earnings that surpassed our
expectations by 23.4%. Earnings in the reported quarter also
surged 2.5% from the year-ago adjusted profit level. The upcast
in earnings was mainly attributed to lower tax expenses.
Lockheed Martin continues to benefit from strong defense spending
on a number of its platform programs like the C-130 Hercules
& C-5 Galaxy transport aircrafts, the Global Positioning
Satellite III (GPS III) system satellites, the Littoral Combat
Ship (LCS), the Terminal High Altitude Area Defense (THAAD)
system and many others.
The company is a well-managed defense major. Its working capital
improvements continue to impress, as is evident from its
inventory turnover of 15.2 times in the trailing twelve months at
the end of the first quarter, compared to only 2.8 times for the
Zacks industry average, showing a strong sign of operational
In addition, Lockheed Martin's operational effectiveness is
evident in its industry-high Return on Investment (ROI) of 38.7%.
This will aid the company to accomplish its long-term goal of
5%-7% revenue growth. Lockheed Martin affirmed its full-year 2013
earnings per share guidance of $8.80-$9.10.
Management is also prudent in returning a substantial portion of
its free cash flow to shareholders through share repurchases and
incremental dividends. It booked free cash flow of roughly $1.9
billion during the first quarter and utilized roughly $900
million for stock buybacks and dividend.
However, a major portion of its business comes from the U.S.
government, so cuts in defense spending could limit the results
of its operating segments. It has factored sequestration in its
2013 sales guidance, which is expected to be at the low end of
the prior range.
Going forward, growth in the Information Systems & Global
Services and the Mission Systems & Training segments is
critical as sequestration is expected to impact about $275
million in each of these segments with the remaining in the other
Given the pros and the cons, the stock is expected to perform in
line with the broader market indices. Currently, Lockheed Martin
has a Zacks Rank #3 (Hold).
However, we prefer peers like
Erickson Air-Crane Incorporated
) with a Zacks Rank #1 (Strong Buy), and
Wesco Aircraft Holdings, Inc.
Northrop Grumman Corp.
), both with a Zacks Rank #2 (Buy).
ERICKSON AIR-CR (EAC): Free Stock Analysis
LOCKHEED MARTIN (LMT): Free Stock Analysis
NORTHROP GRUMMN (NOC): Free Stock Analysis
WESCO AIRCRAFT (WAIR): Free Stock Analysis
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