Lockheed Martin's New Deal Will Boost Your Portfolio
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Glasses may be raised right now at Lockheed Martin (NYSE: LMT) after the company locked down a new $1.05 billion contract with the United States Navy. The task for Lockheed is to provide digital cockpits and integrated missions systems for the Navy’s helicopters. The contract will keep Lockheed working on the project for the next five years.
Billion dollar contracts are nothing new for Lockheed, still the leader in defense system technologies and providing big-budget machinery for the United States military forces. However, the new contract is encouraging to see, as it provides Lockheed another step away from its F-35 fighter jets contract with the Department of Defense. Clearly, Lockheed is still golden for the government.
The contract is part of the US Navy’s new strategy to “build the most technologically advanced maritime helicopter fleet in the world.” The work will include 162 cockpits, integrated mission system and sensors for the MH-60R “Romeo”, as well as cockpits for the MH-60S, another Navy helicopter.
The two helicopters are designed and manufactured by Sikorsky Aircraft, a subsidiary of Lockheed rival United Technologies (NYSE: UTX). UTC has struggled a bit as of late, down almost 10% over the last month. UTC will announce its first quarter 2012 earnings on April 24, and insiders are curious to see how its $16.5 billion buyout of Goodrich in late 2011 will have shaped profits.
As always, Lockheed’s new contract will be reviewed by Congress and must pass a rigorous review, which includes a demonstration of double-digit cost savings. Lockheed has already stated that it plans on saving the government money through its agreement to a long-term contract instead of an annual arrangement.
Lockheed’s dealing with the US Navy is something akin to a meeting between two old friends. Just last month, the global security and aerospace company penned a $715 million contract to complete two new combat ships. The two new contracts represent the certain safety you get with a company like Lockheed. Having gone through the ropes so many times before, its status within the US government and Department of Defense is really unmatched. These large contracts are often created exclusively for Lockheed, and the bidding arena is more of a formality, as other firms simply lack the size, money and engineering capability that Lockheed has.
However, despite the rush of new cash, Lockheed is anything but safe for investors. The company has forever been tortured by the possibility of defense budget cuts as the US continues to outspend the entire world for its defense. As the recession continues to hurt the global economy, specifically that of the European Union, the United States may find it has less to spend on new war machines. That decision, naturally, could have a very negative impact on a company like Lockheed who made 82% of its profit from the US government in 2011. Analysts are weary to announce Lockheed as a “buy”, because a sharp budget cut could prevent it from moving up on its current price at about $87 per share.
Cuts in the defense budget are not the only villain that may bring down Lockheed’s value, though. Sometimes, it can be the fault of the company itself. Such is the case with the F-35 contract, which Lockheed has announced will now carry a 9% increase in price. The F-35 program proved disastrous for Lockheed, and the company hopes it can keep the bad press at bay as it continues on with the contract. If anything, the F-35 contract proves that a mistake with one of these large contracts can really hurt a business, even one as large and experienced as Lockheed.
Another problem for the company is when these large contracts come to an end. Recently, Lockheed has warned that it may have to lay off hundreds of workers a result of two large contracts coming to an end. It is odd for a company with such great cash flow to have to resort to lay offs, but such is the case with large, specialized endeavors done through contract. So don’t be worried with the news of layoffs Lockheed will retain what it needs, and the company still has a good deal of cash at its disposal.
Lockheed’s competitors continue to do what they’ve been doing, handling some of the lower offered contracts. Raytheon (NYSE: RTN), for instance, won a $33 million contract from the US Pacific Command on the same day that Lockheed signed its longer, billion dollar deal. Raytheon is a perfect example of a smaller company reaping the benefits of what Lockheed may be too large to worry about. And while it doesn’t pose a challenge, if the defense budget is cut to a large enough degree, the two companies may find themselves competing more than previously imagined.
Lockheed, more so than Raytheon and others, should be as solid as solid gets. It will continue to bring in large government contracts and defense technologies will keep evolving. There’s always something to be working on for nation’s largest defense contractor. Despite the misstep in the F-35 project, Lockheed continues to be the big dog in the show as evidenced by the new Navy contracts.
But it’s hard to know as an investor that a company like Lockheed could be put in risk with one sweep of the congressional pen. If the global recession continues, the US government, no matter who it is led by, will be forced to examine its gigantic investment in defense technology. Major companies are already bracing themselves for cuts to the defense budget and a more limited pool of government contracts to try for. But we have no idea how badly, if at all, the stock price will be affected by these budget cuts. What we do know, for now, is that Lockheed just nabbed a huge Navy contract, and that’s reason to celebrate.
The Motley Fool has no positions in the stocks mentioned above. StockCroc1 has no positions in the stocks mentioned above. 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.