A Better Defense Spending Environment In 2014 Will Help Lockheed's Results
Last year, Lockheed Martin's ( LMT ) results were severely impacted due to across-the-board government spending cuts, called sequestration. The defense contractor's 2013 top line fell by $1.8 billion, or 4% annually, to $45.4 billion largely due to these cuts. However, in the current year, we anticipate the results to get reprieve from these across-the-board cuts, as they have been eliminated by the government in its fiscal 2014 budget. Instead, spending targets have come in effect that allow government agencies such as the Department of Defense (DoD) to discretely allocate funds to priority areas. We figure this move will help Lockheed's results as it is present on many important government defense programs like the F-35 fighter jet that are viewed as high priority.
We currently have a stock price estimate of $155 for Lockheed Martin , marginally below its current market price.
US Defense Spending Environment Is Expected To Improve In 2014
Lockheed gets more than 80% of its sales from the US government, including around 60% from the DoD. Therefore, the company is highly vulnerable to cuts in the government's defense spending. Last year, sequestration reduced the government's defense budget by $37 billion, which in turn impacted contract volume and sales for Lockheed. This sequestration was in addition to spending cuts of around $487 billion (spread over ten years starting from the government's fiscal 2012) imposed by the Budget Control Act of 2011.
However, earlier this year in January, the government in its budget for fiscal 2014 eliminated these across-the-board spending cuts. Instead, it increased limits on discretionary spending in line with the Bipartisan Budget Act which was passed in December last year. This act provides for additional defense funding of approximately $22 billion and $9 billion for fiscals 2014 and 2015, respectively, according to figures reported by Lockheed. We figure this additional funding along with greater flexibility for government agencies in allocating these funds will aid Lockheed's 2014 results.
Currently, the company anticipates its 2014 top line to fall around $44-45.5 billion. We figure if the budget for fiscal 2015, which starts on October 1, 2014, gets passed in a timely manner, then Lockheed's results for full year 2014 could rise. However, the threat from sequestration, which mandates cuts across programs, remains for periods beyond fiscal 2015 and brings uncertainty about long-term funding that will be available for individual defense programs.
Additionally, in terms of backlog, Lockheed has started 2014 on a strong footing. The defense contractor's $82.6 billion backlog at the start of 2014 was $300 million higher than that at the start of 2013. In all, a relatively better defense funding environment coupled with higher backlog will help Lockheed's results in 2014.