Lockheed Martin: Space, Security Focus will Push Growth

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Whether you love or hate defense contractors and that type of business, you cannot deny that defense contracting provides natural competitive advantages and profitability. The business of war has been excellent: wars in Afghanistan and Iraq, a declared war on terrorism, the threat of conflict in Iran, North Korea, and too many smaller ones to mention are catalysts for spending. However, the economic recession and budget shortfalls by governments around the world have caused cutbacks in military spending. This results in challenges for defense contractors like Lockheed-Martin (NYSE: LMT).

Lockheed has built competitive advantages around its trademark name, which it markets to governments rather than typical consumers.  Indeed, Lockheed’s future growth lies with international sales.  Congress has allowed Lockheed to sell some of the new F-35 fighter planes to other allied nations around the world. Japan recently ordered 42 of the F-35 fighter jets. Turkey has indicated it wanted over a 100 F-35’s, and Italy has also ordered about 90 of the F-35s as well. Lockheed has been aggressively increasing foreign sales as have others in the defense sector. Total sales of military weapons overseas are higher than ever, going from $13 billion in 1995 to over $70 billion dollars in fiscal 2010. In fact, Raytheon (NYSE: RTN) is “diversified,” with about 18% of its sales overseas. Raytheon sells the AMRAAM air-to-air over the horizon missile used on the F-16 and F-22 fighter jets to foreign governments such as NATO members, Taiwan and Israel. Raytheon provides radar and surveillance for border security in the United Kingdom and Saudi Arabia as well.  

Foreign sales will help Lockheed’s profitability.  Lockheed made 47 billion in revenue compared to Raytheon’s 25 billion in revenue. However, in the last year governments throughout the world have cut military spending due to high debt and reduced tax revenue.  Italy has cut its original F-35 order by at least 30%. Canada is reviewing its budget and the cost of F-35s it plans to order.  If the trend continues, there will be fewer defense dollars and lower profits. As a result, a big part of the company’s capex is lobbying.  Last year, Lockheed spent $3.9 million on lobbying governments.  Lockheed, to prevent the spending cuts, will lobby foreign governments to reconsider the cancellations or solicit new nations that still have money to spend. Lockheed has already gotten some help selling weapons to foreign nations from the President and others at the highest levels of the US Government. I expect the help by the US Government will get these countries to follow through with a large portion of these orders even if some are delayed.

In my opinion, Lockheed’s space division will drive growth going forward. NASA eliminated the space shuttle program in 2011, and the U.S. Government reduced NASA’s budget by $650 million. NASA will not have manned space travel before 2017. This is Lockheed’s opportunity to sell to civilian-focused business for leisure space travel and eventually, mining. However, for now, governments are the company’s bread and butter.  Lockheed will get $78 million to maintain the early warning system for US Space & Missile Command. Space Fence is a project that monitors all the hazardous space junk and debris in orbit and allows satellites, rockets, and manned space craft to avoid collision.

Lockheed-Martin will implement the next phase of Space Fence and earn $107 million. Lockheed will also earn $68 million for on- orbit engineering support of the next generation Global Positioning System for the U.S. military. General Dynamics (NYSE: GD) also has government space contracts such as the space-to-ground tracking support for the Tracking and Data Relay Satellite System during near-Earth missions. General Dynamics will modernize the Tracking and Data Relay Satellite System for the U.S. Government and remove obsolete parts of the system. Although Congress cut NASA’s budget, there is still opportunity for defense contractors to make money with government space contracts. 

Private companies need communication, TV, and weather satellites manufactured and put into orbit. For example, Lockheed recently finished two commercial satellites for a Japanese company and a Vietnamese company; and both satellites will launch in 2012. The Vietnamese satellite will handle communications and TV signals for the Vietnam Posts and Telecommunications Group. The Japanese satellite will provide communications and TV for coverage over Japan, Indonesia, Middle East and Oceania. Some universities, such as the University of Colorado and Montana State, have also used Lockheed’s space service in 2011.

These universities use the satellites for research and give engineering students the opportunity to work on satellite technology before graduation. In order to meet this demand, Lockheed resurrected the old Athena II rocket design and updated it to fly small payloads and satellites under 110 kilograms into space. Several companies or universities can share the launch and get payloads and satellites into space for as little as $250,000. Larger satellites require $10 million to launch and up to nine of these larger satellites can be launched on one trip. Lockheed can combine the smaller, cheaper satellites with the larger more expensive satellites on the same mission. Lockheed has a great opportunity to build and launch these satellites for a hefty profit. In my opinion, Lockheed will use its space division as a safety net for any potential losses in military spending.

Lockheed’s cyber security division develops security for the government and other corporations. Lockheed continues to move into cyber security to earn more of the market share in this industry.  For example, Lockheed-Martin will organize and operate the Defense Civilian Personnel Data System for the Defense Department and earn $254.7 million over five years. The Defense Civilian Personnel Data System contract will involve information technology support to manage the personal information of over 800,000 civilian defense workers including background checks and classified clearances.  Lockheed will update and move the data from a client-server to a web-based architecture and integrate all user groups into Lockheed-Martin’s new Denver Data Center.

The U.S. Government wants to stop cyber theft and cyber terrorism. Lockheed-Martin, as a result, will earn $454 million to partner with the Defense Department to operate the Pentagon’s Cyber Crime Lab. Other defense contractors plan a similar business strategy to expand in computer and network security. Northrop Grumman will earn $50 million euros from a cyber security contract awarded by NATO. Northrop will partner with Italian defense company Finmeccanica to improve the detection and response of cyber security threats in NATO’s computer networks. Boeing (NYSE: BA) started its Cyber Solutions division in 2008 and bought  the computer network and security specialist Narus Networks of India in 2010. Boeing wants to protect its computer network and expand into the lucrative cyber security business, and mergers with experienced cyber companies with help facilitate this. Boeing will diversify into cyber security, like Lockheed, to offset lower military weapons budgets.  

Military weapons sales will likely always form a large part of Lockheed’s revenues. However, the company may need to ramp up its space and security divisions to maintain profitability because of military budget cutbacks around the world. This is already underway with satellite and cyber security contracts with the U.S. Government and private corporations.

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