This Aerospace Stock Will Fly High

Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Lockheed Martin Corporation (NYSE: LMT) has received a $152 million contract from the U.S. Air Force for Sniper® Advanced Targeting Pod (ATP) sustainment support over a five-year period. Also, Lockheed Martin has been honored for its support in achieving significant accomplishments on the Federal Aviation Administration's (FAA) En Route Automation and Modernization (ERAM) program. Earlier in late july, Lockheed Martin reported impressive 2Q results with EPS of $2.38 beating the consensus estimates of $1.91. All these events demonstrate the strength of Lockheed’s portfolio. Going forward, better than expected bookings in 2Q supports my view of a book-to-bill greater than 1 for 2012. I believe that Lockheed will continue to generate significant cash to limit the downside in the company's shares given its aggressive cash deployment strategy (buybacks and dividends).

Positive Vibes Everywhere

On August 22nd, the Department of Defense (DOD) announced the three winners for the Engineering Manufacturing and Development Contract of Joint Light Tactical Vehicle (JLTV) Lockheed, Oshkosh Corporation (NYSE: OSK) & AM general beat out Boeing company (NYSE: BA), Navistar International Corporation (NYSE: NAV) and General Dynamics Corp. (NYSE: GD) for thee lone vehicle development program on the horizon. I see this as a huge positive for the company as it has previously not been a significant provider of ground vehicles to the US military. Also, the elimination of General Dynamics, a major provider of tracked and wheeled vehicles, will strengthen Lockheed's position in the market. I believe these contracts will bring long term rewards in the beginning of 2014. The following chart summarizes the impact of this news on the stock prices of Navistar and Oshkosh:

<img src="/media/images/user_13963/lmt-osk-nav_1_large.JPG" />

Navistar produces medium and heavy duty trucks for the U.S. military under the International Military and Government LLC name. The trucks the company manufactures for the military compete with those produced by Oshkosh's Defense segment. Clearly, the stock price of Oshkosh started to move upward soon after the announcement of winners, while Navistar's stock started to decline at the same time. However, Navistar has seen some recovery lately due to the introduction of android to mobile fleet tracking app.

The following chart summarizes the impact of this news on the stock prices of Lockheed and Boeing:

<img src="/media/images/user_13963/balmt_1_large.JPG" />

Boeing company has seen a little downfall after the news. However, I am optimistic that the stock will recover in near term given robust growth in civil OE. Moreover, I believe that the Qantas' order cancellation also have some contribution to the declining prices. 

I believe there is plenty of room left for the winners to see upward stock movement. I expect long term rewards of this contract to be huge.

Visibility Over F-35 Program

Internationally, Lockheed’s F-35 program has been receiving strong support since its introduction. Japan has reaffirmed their intentions to purchase the F-35 and signed a letter of offer and acceptance to order four initial aircraft. Norway has also announced their order for two aircraft, which is expected to be followed by up to 50 additional aircraft. This past quarter, the company has also submitted a proposal to supply 60 aircraft to South Korea. Overall, the program is demonstrating increasing maturity and tempo. I believe the F-35 program will continue to make good progress for the foreseeable future.

Potential Contracts in Near Term

Despite seasonal headwinds, Lockheed’s 2Q book to bill was 0.91, a sequential improvement vs. 1Q. The company has several potential contracts like F-35 LRIP- 5, the fleet ballistic missile program, and FMS orders in the coming quarters. I am optimistic that Lockheed will book a large classified satellite contract in space in the coming quarter. As a result, I expect Lockheed’s book to bill will end 2012 greater than 1. In my view, that’s a distinguishing feature as few of Lockheed’s peers will have a comparable book-to-bill for 2012.

Despite a volatile macro environment, stocks like Lockheed have outperformed many aerospace stocks, likely due to its non-cyclical, strong dividend yields (Lockheed currently offers impressive dividend yield of 4.3%) and low beta from companies backed up by Government spending. Lockheed has a differentiated portfolio, a 12% FCF yield and scope for sustainable FCF improvement through 2013. The company’s shareholder friendly cash deployment strategy that focuses on buybacks and dividends further provides support to the shares. Thus, I recommend it a buy.


ankitagrawal has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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