Lockheed Martin: Strong Gains Expected This Year
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As a teenager I was aware of the decline in defense spending. I had friends whose parents lost jobs at Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT) and Rockwell (COL). Over the years aerospace has been a tenuous industry. Not much has changed as the aerospace industry continues to be a roller coaster ride at times.
Lockheed Martin employs over 123,000 people worldwide (cutting its staff from 146,000 in 2011). The company has received the Collier Trophy, an annual aviation award presented to those companies that have made the greatest aeronautic achievements in America improving performance, safety and efficiency, six times.
Lockheed Martin reached a 52 week high closing at just over $91 with the arrival of Northrop Grumman's (NYSE: NOC) first F-35 center fuselage produced by its integrated assembly line (IAL) March 16th. Northrop has delivered 69 center fuselages since 2005, however this is the first produced using the IAL system. What separates the IAL from other assembly operations is the utilization of robotics and automation, which increases capacity and assembly capability. The results consistently surpass normal engineering tolerances that are not easily achieved utilizing traditional manual methods.
Nevertheless it seems like a crap shoot at times dealing with companies that focus on defense products. The almighty budget seems to control the ups and downs of the industry. The bleeding occurs quite often as one scab heals from a budget cut and another blow strikes yet a new wound.
Lockheed Martin however, seems to fare better than its competitors. The company was recently awarded a $66 million follow-on contract from the Missile Defense Agency to continue the successful Terminal High Altitude Area Defense (THAAD) weapon system. THAAD is the only weapon system able to intercept both in the endo and exo atmospheres. THAAD is just another great example of Lockheed-Martin's cutting edge technology that enables it to stay ahead of its aerospace competitors.
The current budget cuts of $350 billion in the U.S. Department of Defense over the next 10 years do create a hiccup that must be heard. If lawmakers don't avert an additional $500 billion in cuts for 2013 looming on the horizon, thousands of defense workers could find a pink slip in their in-box.
Boeing's refueling plane, used for littoral combat ships, and Lockheed Martin's navy contracts would all be seriously curtailed or possibly eliminated. Lockheed Martin would most likely experience some strenuous blows to its mid section. As these large defense contractors contemplate possible layoffs it could be a possible silver lining for small to mid size contractors.
As experienced seasoned aerospace workers are pushed into the job market, mid-size contractors stand to gain considerable talent available with a wide range of skills. Running leaner operations and fewer layers of management, small and mid-size contractors will most likely fend off the budget attacks.
Lockheed Martin stands to lose 13 of the company's F-35 Lightning strike-fighter jets with Obama's planned cuts. The company however is supportive of the Administration's stance. “We understand the funding constraints that require the Department of Defense to reduce the number of aircraft procured to 29 in fiscal 2013 and to move 179 aircraft out of the five-year plan, and we will continue to partner with the department to implement the changes as efficiently as possible.”
Boeing's first reaction to budget cuts was to close its Wichita Kansas plant shifting jobs to three other plants thus eliminating 2,160 jobs. Kansas is outraged as lawmakers assisted Boeing in securing an Air Force tanker project in February.
Despite experiencing some direct budget cut hits in the United States, Raytheon (NYSE: RTN) was awarded a 60 million pound contract from the UK Ministry of Defense for its Paveway IV GPS precision-guided munitions project. As the U.S. government moves toward a more austerity budgetary stance, the aerospace defense industry will need to pursue global contracts even more aggressively.
Lockheed Martin’s search for global partners led recently to a contract with India for six C0130J aircrafts to the tune of $1.2 billion. The contract also includes training of aircrew and maintenance staff as well as providing ground support and test equipment.
Stock prices overall for defense contracts have not faltered despite the budget cut discussions. Boeing closed up at $75, as did General Dynamics (NYSE: GD) at $74, Raytheon at $52 and Northrop Grumman at $62.
Lockheed Martin over the years has consistently rewarded investors with high dividends paying out $1 per share the past two quarters. In 2011 the company paid out $3.25 per share in dividends up from $2.64 in 2010. Shares have seen a rise of over 10% this year.
Lockheed has always maintained a strong presence in the defense industry despite receiving its share of cuts. Currently it seems to be dealing well with the current round of budget whacks. Much of the continued strength will rest on the success of the F-35 fighter jet program. Since the Defense Department has postponed a rather large portion of the planned F-35 purchase, other countries, including Italy and Japan, are indicating similar thoughts of deferment or cancellation.
As an alternative, Lockheed is throwing its hat into the ring with General Dynamics hoping to win the right to develop a joint light tactical vehicle. The F-16 program could stand to gain overall if the F-35 delays continue to remain on hold.
Part of the thrill of a roller coaster ride is hanging on for dear life and screaming at the top of your lungs in fear. Then as soon as you get off the ride you run to the end of the line to get back on. If you had jumped on Lockheed Martin’s roller coaster in January 1977 the ride would have cost you around $9.25. This week the same ride was over $91. I would say almost a 1000% return in 35 years, or 6.5% compounded, is not a bad ride but it took a long time to get there. The longer it takes for Lockheed to build wealth, the lower its comparative return is to alternatives. Nonetheless, Lockheed remains a bellwether of consistency.
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