Lockheed Martin's New MH-60 Deal Will Propel Stock Higher
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Lockheed Martin (NYSE: LMT) just finished an important deal with the U.S. military, and this is a good sign for a company that has hit a couple of snags recently. The $259 million contract represents the addition of two fighter jets to a previous order from the Pentagon, but this comes after Lockheed Martin’s other customers have backed off a bit on their enthusiasm for future orders. While Lockheed Martin’s Joint Strike Fighter has contracts with nine countries, three of those (Turkey, Italy, and Canada) are either freezing their budgets or reducing their orders. Regardless, I believe the U.S.’s decision to order 32 jets total (two from the $259 million contract, plus thirty from an earlier $4 billion contract that’s still being hammered out) will keep Lockheed Martin in good shape.
Lockheed Martin’s business is similar to other aerospace/defense companies such as Boeing (NYSE: BA), Northrop Grumman (NYSE: NOC), and Raytheon (NYSE: RTN), and Lockheed Martin stock compares favorably in my opinion. Lockheed Martin is trading at a price to earnings ratio of 11.43 and price to sales ratio of 0.62, and these ratios are about average compared to the ones for Boeing, Northrop Grumman, and Raytheon. Considering Lockheed Martin’s top-notch quality of offerings and potential for future growth, these ratios suggest that Lockheed Martin may be a bit underpriced right now. Gross margin (10.79%) and operating margin (8.14%) for Lockheed Martin are admittedly somewhat low compared to its competitors, but the sheer size of Lockheed Martin’s business should help to balance that out. In comparison, Boeing's gross margin is 18.72% and Northrop gross margin is 21.3%, which is in part due to their maintenance, upgrade and service contracts for military hardware.
One thing that impresses me about Lockheed Martin is its commitment to the U.S. Department of Defense’s Mentor-Protégé program. The latest development in this regard is Lockheed Martin’s partnership with Sciaky, which figures to help both companies immensely. Here’s how Tom Simmons, vice president of supply chain management for Lockheed Martin, explained the benefits: “Through this partnership, we will mentor Sciaky in the development of their Electron Beam Direct Manufacturing capability with the expectation that we can eventually apply this technology for the F-35 Joint Strike Fighter, our nation's largest and most important defense program.” Lockheed Martin’s Joint Strike Fighter is clearly a significant part of its product mix right now, which is one factor making this agreement even more valuable.
Besides the Joint Strike Fighters, Lockheed Martin has numerous other pieces of hardware that the U.S. military wants. Indeed, the company just secured a five-year deal worth $1.05 billion for over 200 sets of cockpits and systems/sensors for the MH-60R “Romeo” and MH-60S “Sierra” helicopters. These helicopters are crucial for the Navy’s ability to detect possible threats, although the Sierra is also used for other tasks like cargo resupply and search and rescue. From what I can tell, the Navy could ask for more MH-60’s in the future, which would obviously benefit Lockheed Martin as a provider of cockpits and systems/sensors. Meanwhile, investors should note that the MH-60’s are actually manufactured by a subsidiary of United Technologies (NYSE:UTX), so that stock would benefit too if more MH-60’s are ordered under a multi-year procurement contract. The MH-60R/MH-60S is specifically named in the Fall 2011 block buying contract procurement report to Congress. Investors should understand that appropriations are never a certainty, however, especially in an environment geared towards budget cuts.
One more area where Lockheed Martin is having success is its communication systems. Specifically, the U.S. Air Force Electronic System Center is renewing its contract with the company for its Shared Early Warning System. This is an important development because it shows Lockheed Martin’s strength outside of the market for military aircraft, and the deal’s initial value is $21.5 million. For the entire five years, though, the contract can be worth as much as $78 million. While this contract isn’t as lucrative as some of the others I’ve discussed, it is still significant because the Shared Early Warning System is used in many different areas. In my opinion, this technology could become increasingly important.
Another recent headline that should have shareholders excited is Lockheed Martin’s efforts to decrease its environmental impact. Most of Lockheed Martin’s customers are government entities, so it is possible that the company’s environmental success would help it to win contracts in the future. Even without that, a strong environmental policy can allow a company to succeed as business situations continue to evolve. With that in mind, Lockheed Martin was able to significantly decrease its water use, carbon emissions, and waste-to-landfill in a period of time when it also increased revenues. I recommend investors don’t overlook this news because its future financial impact could be significant.
While I’ve already outlined some of Lockheed Martin’s great products and business practices, there is of course one dark cloud hanging over all of this. As part of last year’s Budget Control Act, defense spending is set to be automatically reduced by $600 billion because the relevant government committee couldn’t reduce the budget by $1.2 trillion. This situation can certainly be averted if Congress reaches a compromise on the matter, but it is possible that nothing changes. At this point in time, I think investors can safely buy Lockheed Martin, although I do admit that the stock may need to be sold later if the government doesn’t appear to be changing its course.
After all, the stock currently has a dividend yield of 4.4%, and trends on the statement of cash flows show that there is no reason this will stop anytime soon. The company experienced a net change in cash of $1.321 billion during 2011, and operating cash inflow of $4.253 billion played a major role in that. With significant amounts of that operating cash inflow going towards dividends and stock repurchases, it is clear that Lockheed Martin’s management is confident about the company’s future. I recommend that investors take advantage of Lockheed Martin's dividends (and possible price appreciation), while keeping a close eye on Congress’s plans for defense spending.
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